AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998.
File Nos.
33-20313
811-5479
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. (X)
Post-Effective Amendment No. 17
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20
TEMPLETON VARIABLE PRODUCTS SERIES FUND
(Exact Name of Registrant as Specified in Charter)
500 East Broward Blvd., Suite 2100
Fort Lauderdale, FLORIDA 33396-3091
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(813) 823-8712
500 East Broward Blvd., Suite 2100
Fort Lauderdale, FLORIDA 33396-3091
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ________________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[X] on May 1, 1998 pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
No filing fee is due because an indefinite number of shares is deemed to have
been registered in reliance on Section 24(f) of the Investment Company Act of
1940.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Templeton Money Market Fund and Class 1 Shares of All Other Series)
N-1A Location in
Item N Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Summary" (each series)
3. Condensed Financial Information "Financial Highlights" (each series)
4. General Description "Investment Objectives and Policies"
and "Risk Considerations"
(each series); "Common Securities
and Investment Techniques;" "Common
Risk Factors"
5. Management of the Fund "Portfolio Management"(each series);
"Management of the Trust
5A. Management's Discussion of Fund Contained in Registrant's
Performance Annual Report to
Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Purchase of Shares";
Being Offered "Net Asset Value"
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Class 2 Shares of All Series Except Templeton Money Market Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Summary" (each series)
3. Condensed Financial Information "Financial Highlights"
(each series)
4. General Description "Investment Objectives and
Policies" and "Risk
Considerations" (each series);
"Common Securities and Investment
Techniques;" "Common Risk Factors"
5. Management of the Fund "Portfolio Management"
(each series); "Management of
the Trust"
5A. Management's Discussion of Fund Contained in Registrant's
Performance Annual Report to Shareholders
6. Capital Stock and Other Securities "Dividends and Distributions";
"Distribution Plan;" "Other
Information"
7. Purchase of Securities Being "Purchase of Shares"
Offered "Distribution Plan;"
"Net Asset Value"
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in Statement of Additional Information
(For All Series)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History "Introduction"
13. Fund Investment Objectives and "Investment Objectives and
Policies Policies;" "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees"
Holders of Securities
16. Investment Advisory and Other "Investment Management and
Services Other Services"
17. Brokerage Allocation "Brokerage Allocation"
18. Capital Stock and Other Securities "Description of Shares"; "Other
Information" in the Prospectus
19. Purchase, Redemption and Pricing "Purchase and Redemption of
of Securities Being Offered
Shares"; "Distribution Plan;"
"Net Asset Value" in
the Prospectus
20. Tax Status "Tax Status"
21. Underwriters Purchase of Shares (Prospectus)
22. Calculation of Performance Data "Performance
Information"
23. Financial Statements "Financial Statements"
Templeton Variable Products Series Fund
Prospectus--May 1, 1998
CLASS 1 SHARES
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Templeton Asset Allocation Fund
Templeton Bond Fund
Templeton Developing Markets Fund
Templeton International Fund
Templeton Stock Fund
Templeton Money Market Fund
Templeton Variable Products Series Fund (the "Trust"), is an open-end,
management investment company, consisting of ten separate investment portfolios
or funds (each a "Fund"), each of which has different investment objectives.
This prospectus contains information that a prospective investor should know
before investing.
Shares of each Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Contracts involve certain fees and expenses not described in this Prospectus and
also may involve certain restrictions or limitations on the allocation of
purchase payments or Contract values to different investment vehicles. In
particular, certain series or classes of the Trust may not be available in
connection with a particular Contract or in a particular state. See the
applicable Contract prospectus for information regarding fees and expenses of
the Contract and any applicable restrictions or limitations.
Each Fund, except the Money Market Fund, has two classes of shares: Class 1 and
Class 2. This prospectus offers only Class 1 shares of these multiclass Funds
and is for use with Contacts that make Class 1 shares of these Funds available.
For more information about the Trust's classes, see "Other
Information--Capitalization and Voting Rights," below.
A statement of additional information ("SAI") dated May 1, 1998, has been filed
with the Securities and Exchange Commission and is incorporated in its entirety
by reference in and made a part of this prospectus. The SAI is available without
charge upon request to the Trust's underwriter, Franklin Templeton Distributors
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 or by calling
1-800-774-5001 or 1-813-823-8712.
Shares of each Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Shares of each Fund involve investment risks, including the
possible loss of principal.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
OR INSURANCE COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS OFFERING THE VARIABLE INSURANCE CONTRACT. BOTH PROSPECTUSES SHOULD BE
READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
TABLE OF CONTENTS PAGE
FRANKLIN GROWTH INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
FRANKLIN SMALL CAP INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
MUTUAL DISCOVERY INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
MUTUAL SHARES INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON ASSET ALLOCATION FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON BOND FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON DEVELOPING MARKETS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON INTERNATIONAL FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON MONEY MARKET FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON STOCK FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
COMMON SECURITIES AND INVESTMENT TECHNIQUES
COMMON RISK FACTORS
PURCHASE OF SHARES
NET ASSET VALUE
REDEMPTION OF SHARES
EXCHANGES
MANAGEMENT OF THE TRUST
DIVIDENDS AND DISTRIBUTIONS
FEDERAL INCOME TAX STATUS
OTHER INFORMATION
FRANKLIN GROWTH INVESTMENTS FUND
EXPENSE SUMMARY
Franklin Growth Investments Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Franklin Growth Investments Fund
The primary investment objective of the Franklin Growth Investments Fund is
capital appreciation. Current income is only a secondary consideration in
selecting portfolio securities.
Under normal market conditions, the Fund will invest primarily (at least 65% of
assets) in equity securities, including common and preferred stocks, or
securities convertible into common stocks, which are believed to offer favorable
possibilities for capital appreciation, but some of which may yield little or no
current income. The Fund's assets may be invested in shares of common or capital
stock traded on any national securities exchange or over-the- counter, in
convertible securities or, may keep a significant portion of its assets in cash
from time to time.
The Investment Manager will generally make long-term investments in equity
securities which have been selected based upon fundamental and quantitative
analysis. Following these policies, the Fund will typically invest predominantly
in equity securities issued by large-cap or mid-cap U.S. companies, which have
market capitalizations of $1 billion or more. It may also invest in smaller
capitalization companies, which may be subject to different and greater risks,
but there is no present intention of investing more than 20% of the Fund's
assets in such securities. As an operating policy, the Fund currently intends to
invest no more than 15% of its assets in foreign securities, including
Depositary Receipts, which involve special risks including currency fluctuations
and political uncertainty.
Consistent with its investment objective, the Fund expects to have a portion of
its assets invested in securities of companies involved in computing
technologies or computing technology-related companies. The technology sector as
a whole has historically been volatile and issues from this sector tend to be
subject to abrupt or erratic price movements. The Portfolio seeks to reduce such
risks through extensive research, and emphasis on more globally-competitive
companies.
OTHER INVESTMENTS. The Fund currently intends to invest no more than 5% of its
assets in debt obligations, including convertible debt obligations, rated Ba or
lower by Moody's or BB or lower by S&P, or unrated securities determined by the
Manager to be of comparable quality. SEE "COMMON RISK FACTORS," "COMMON
SECURITIES AND INVESTMENT TECHNIQUES" AND THE APPENDIX. The Fund may invest in
convertible preferred stocks, which are equity securities, generally carry a
higher degree of market risk than debt obligations, and often may be regarded as
speculative in nature. SEE "COMMON SECURITIES AND INVESTMENT TECHNIQUES" Under
the policies discussed in "Common Securities and Investment Techniques" and in
the SAI, the Fund may also borrow to one-third of the value of its total assets
(thought it does not currently expect any borrowing to exceed 5%); write covered
call options; purchase put options on securities; loan its portfolio securities;
enter into repurchase transactions; invest in restricted or illiquid securities;
and engage in other activities specifically identified for this Fund.
RISK CONSIDERATIONS
Franklin Growth Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it may invest a portion of its assets in small cap companies and foreign
securities. Stocks, and other equity securities representing an ownership
interest in a corporation, have historically outperformed other asset classes
over the long term, but tend to fluctuate more dramatically over the shorter
term.
Securities of smaller or unseasoned companies have historically presented
greater risks of price swings than securities of larger, more established
companies. Foreign securities, especially in developing markets, are subject to
special and additional risks related to currency fluctuations, market volatility
and economic, social and political uncertainty. For more details about these and
other risks, please see "Common Securities and Investment Techniques" and
"Common Risk Factors," below.
PORTFOLIO MANAGEMENT
Franklin Growth Investments Fund
Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. The Investment Manager also performs
similar services for other funds.
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.
Conrad B. Herrmann
Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann holds a Master of Business Administration degree from Harvard
University and a Bachelor of Arts degree from Brown University. Mr. Herrmann is
a Chartered Financial Analyst has been with the Franklin Templeton Group since
1989 and prior thereto was Vice President and General Manager of Aquila
Management. He will manage the Fund from inception.
Kevin Carrington
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carrington is a Charter Financial Analyst and holds a Bachelor of Science
degree in business administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992 and will manage the Fund
from inception.
Vivian J. Palmieri
Portfolio Manager
Franklin Advisers, Inc.
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams College.
He has been with the Franklin Templeton Group since 1965. Mr. Palmieri will
manage the Fund from inception.
For its services, the Investment Manager receives a fee equivalent on an annual
basis to 0.60% of the average daily net assets of the Fund, reduced to 0.50% of
such assets in excess of $200 million, to 0.40% of such assets in excess of $1.3
billion.
FRANKLIN SMALL CAP INVESTMENTS FUND
EXPENSE SUMMARY
Franklin Small Cap Investments Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Franklin Small Cap Investments Fund
The investment objective of the Franklin Small Cap Investments Fund is long-term
capital growth. The Fund seeks to accomplish its objective by investing
primarily in equity securities of small capitalization growth companies.
Investments in small capitalization companies may involve greater risks and
greater volatility than investments in larger and more established companies.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund will invest at
least 65% of its assets in equity securities of small capitalization growth
companies ("small cap companies"). A small cap company generally has a market
capitalization of less than $1 billion at the time of the Fund's investment and,
in the opinion of the Fund's Manager, is positioned for rapid growth in
revenues, earnings or assets. Market capitalization is defined as the total
market value of a company's outstanding common stock. The securities of small
cap companies are traded on U.S. or foreign stock exchanges and
over-the-counter. As an operating policy the Fund will not invest more than 10%
of its assets in securities issued by companies with less than three years of
continuous operation.
The Fund seeks to invest at least one-third of its assets in equity securities
of companies with market capitalizations of $550 million or less; there is no
assurance, however, that the Fund will always be able to find suitable companies
to include in this one-third portion. The Manager will monitor the availability
of securities suitable for investment by the Fund and recommend appropriate
action to the Board of Trustees of the Trust if it appears that this goal will
not be attainable under the Fund's current objective and other policies. Equity
securities of small cap companies may consist of common stock, preferred stock,
warrants for the purchase of common stock, and convertible securities. The Fund
currently does not intend to invest more than 10% of its assets in convertible
securities. See "Common Securities and Investment Techniques."
SELECTION OF PORTFOLIO INVESTMENTS. The Fund has been designed to provide
investors with potentially greater long-term rewards by investing in securities
of small cap companies which may offer the potential for significant capital
appreciation since they may be overlooked by investors or undervalued in
relation to their earnings power. Small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, and therefore may provide greater opportunities for long-term capital
growth as a result of relative inefficiencies in the marketplace. Such companies
may be undervalued because they are part of an industry that is out of favor
with investors, although the individual companies may have high rates of earning
growth and be financially sound. Selection of small cap company equity
securities for the Fund will be based on characteristics such as the financial
strength of the company, the expertise of management, the growth potential of
the company within its industry and the growth potential of the industry itself.
Small cap companies often pay no dividends and current income is not a factor in
the selection of stocks. The Manager uses a disciplined approach to stock
selection, blending fundamental and quantitative analysis.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its assets in foreign
securities, including those of developing market issuers and sponsored or
unsponsored Depositary Receipts. The Fund presently does not intend to invest
more than 5% of its assets in developing markets securities.
OTHER INVESTMENTS. Although the Fund's assets will be invested primarily in
equity securities of small cap companies, the Fund may invest up to 35% of its
assets in other instruments, which may cause its performance to vary from that
of the small capitalization equity markets. The Fund may invest in equity
securities of larger capitalization companies which the Fund's Manager believes
have strong growth potential, or in equity securities of relatively well-known,
larger companies in mature industries which the Manager believes have the
potential for capital appreciation.
The Fund may also invest in debt securities which the Manager believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income is incidental to the
Fund's objective of capital growth. The Fund may invest in debt securities rated
B or above by Moody's or S&P, or in unrated securities the Manager has
determined are of comparable quality. Currently, however, the Fund does not
intend to invest more than 5% of its assets in debt obligations (including
convertible debt securities) rated lower than BBB by S&P or Baa by Moody's or,
if unrated, determined by the Manager to be of comparable quality. SEE "COMMON
SECURITIES AND INVESTMENT TECHNIQUES," "COMMON RISK FACTORS," AND THE APPENDIX.
The Fund currently does not intend to invest more than 10% of its assets in real
estate investment trusts ("REITs") including small capitalization REITs.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Securities
and Investment Techniques," "Common Risk Factors," and the SAI, the Fund may
also write covered put and call options on securities or financial indices;
purchase put and call options on securities or financial indices; purchase and
sell futures contracts or related options with respect to securities, indices
and currencies; invest in restricted or illiquid securities; lend portfolio
securities; borrow up to one-third of the value of its total assets; enter into
repurchase or reverse repurchase agreements; and engage in other activities
specifically identified for this Fund.
RISK CONSIDERATIONS
Franklin Small Cap Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it invests primarily in small cap companies and foreign securities.
Stocks, and other equity securities representing an ownership interest in a
corporation, have historically outperformed other asset classes over the long
term, but tend to fluctuate more dramatically over the shorter term.
The Fund will primarily invest in relatively new or unseasoned companies which
are in their early stages of development, or small cap companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. Securities of smaller or unseasoned companies present
greater risks than securities of larger, more established companies. The
companies may have relatively small revenues, limited product lines, and may
have a small share of the market for their products or services. Small cap
companies may lack depth of management, they may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms, or they may be developing
or marketing new products or services for which markets are not yet established
and may never become established. Due to these and other factors, small cap
companies may suffer significant losses as well as realize substantial growth,
and investments in such companies tend to be more volatile and are therefore
speculative. Besides exhibiting greater volatility, small cap company stocks
may, to a degree, fluctuate independently of larger company stocks. SEE "COMMON
RISK FACTORS." THE PORTFOLIO MAY NOT BE APPROPRIATE FOR SHORT-TERM INVESTORS,
AND AN INVESTMENT IN THE PORTFOLIO SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. INVESTMENTS IN
FOREIGN SECURITIES, PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "COMMON RISK FACTORS" BELOW AND IN THE SAI.
PORTFOLIO MANAGEMENT
Franklin Small Cap Investments Fund
Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. The Investment Manager also performs
similar services for other funds.
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.
Edward B. Jamieson
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Jamieson holds a Bachelor of Arts degree from Bucknell University and a
Master's degree in accounting and finance from the University of Chicago
Graduate School of Business. He has been with the Franklin Templeton Group since
1987. He is a member of several securities industry-related committees and
associations. He has managed the Small Cap Fund from inception.
Michael McCarthy
Portfolio Manager
Franklin Advisers, Inc.
Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with the Franklin Templeton Group since
1992. He has managed the Small Cap Fund from inception.
The Fund is obligated to pay the Investment Manager a monthly fee computed at
the annual rate of 0.75% of the Fund's average daily net assets up to and
including $200 million, plus 0.65% of the value of average daily net assets up
to and including $1.3 billion, plus 0.55% of the value of average daily net
assets over $1.3 billion.
MUTUAL DISCOVERY INVESTMENTS FUND
EXPENSE SUMMARY
Mutual Shares Investments Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Mutual Discovery Investments Fund
The investment objective of the Mutual Discovery Investments Fund is capital
appreciation.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or money market
instruments. The Fund may invest in securities from any size issuer, and may
invest a substantial portion of its assets in securities of small capitalization
issuers, which have market capitalizations of less than $1 billion. Securities
of foreign or small cap issuers may be subject to different and greater risks,
as discussed below. The Fund may invest in securities that are traded on U.S. or
foreign exchanges, NASDAQ national market or in the over-the-counter market. It
may invest in any industry sector, although it will not concentrate in any one
industry. From time to time, the Fund may hold significant cash positions until
suitable investment opportunities are available, consistent with its policy on
temporary investments.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation loan participations and trade claims, of debtor companies involved in
reorganization or financial restructuring, some of which may have very long
maturities. Some of the Indebtedness is illiquid.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of its Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Investment Manager may itself seek to influence or control
management or may cause the Fund to invest in other entities that purchase
securities for the purpose of influencing or controlling management, such as
investing in a potential takeover or leveraged buyout or investing in other
entities engaged in such practices.
FOREIGN INVESTMENTS. The Fund may purchase securities in any foreign country,
developed or undeveloped, and currently expects to invest up to 50% or more of
its total assets in foreign securities, including sponsored or unsponsored
Depositary Receipts. The Fund presently does not intend to invest more than 5%
of its assets in securities of developing markets including Eastern European
countries and Russia. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals.
CURRENCY TECHNIQUES. The Fund generally expects to hedge against currency risks
to the extent that hedging is available. Currency hedging techniques may include
investments in foreign currency futures contracts, options on foreign currencies
or currency futures, forward foreign currency exchange contracts ("forward
contracts") and currency swaps, all of which involve specialized risks. See
"COMMON RISK FACTORS."
CREDIT QUALITY. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations
OTHER INVESTMENT POLICIES. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Common Securities and Investment Techniques,"
"Common Risk Factors," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase securities and debt
obligations on a "when-issued" or "delayed delivery" basis; invest in
collateralized mortgage obligations; borrow up to one-third of the value of its
total assets; invest in restricted or illiquid securities; purchase and sell
exchange-listed and over- the-counter put and call options on securities, equity
and fixed-income indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and engage in other activities
specifically identified for this Fund.
RISK CONSIDERATIONS
Mutual Discovery Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it may invest in foreign securities, small cap companies and lower-rated
debt obligations. Stocks, and other equity securities representing an ownership
interest in a corporation, have historically outperformed other asset classes
over the long term, but tend to fluctuate more dramatically over the shorter
term.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. Investments in
foreign developing markets involve heightened risks relating to the smaller size
and lesser liquidity of those markets. Investors should consider carefully the
substantial risks involved in investing in foreign securities, risks that are
heightened in developing markets. See "Common Risk Factors" below and in the
SAI.
Securities of smaller companies, particularly if they are unseasoned, present
greater risks than securities of larger, more established companies. The smaller
companies in which the Fund invests are often not well known, may often trade at
a discount and may not be followed by institutions. The companies may have
relatively small revenues, limited product lines, and a small share of the
market for their products or services. Small cap companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small cap companies may suffer significant losses as
well as realize substantial growth, and investments in such companies tend to be
more volatile and are therefore speculative. Besides exhibiting greater
volatility, small cap company stocks may fluctuate independently of larger
company stocks. See also "Common Risk Factors."
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. Because of the Fund's policy of investing in lower
rated, higher risk debt obligations, an investment in the Fund is accompanied by
a higher degree of risk than is present with an investment in higher rated,
lower yielding obligations. Accordingly, investors considering the Fund should
evaluate their overall investment goals and tolerance for risk. See "Common Risk
Factors" and Appendix.
PORTFOLIO MANAGEMENT
Mutual Discovery Investments Fund
Franklin Mutual Advisers, Inc., 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078 is the Investment Manager. The Investment Manager manages the
Fund's assets and makes its investment decisions. The following persons are
primarily responsible for the day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996 and will
manager the Fund from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the Fund
from inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Fund from inception.
MANAGEMENT FEES
For its services, the Investment Manager receives a fee equivalent on an annual
basis to 0.80% of the average daily net assets of the Fund.
MUTUAL SHARES INVESTMENTS FUND
EXPENSE SUMMARY
Mutual Shares Investments Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Mutual Shares Investments Fund
The principal investment objective of the Mutual Shares Investments Fund is
capital appreciation, with income as a secondary objective.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests
primarily in domestic equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer, including
smaller capitalization companies, which may be subject to different and greater
risks. See "Common Risk Factors." It will tend to invest, however, in securities
of issuers with market capitalizations in excess of $500 million. It may invest
in securities that are traded on U.S. or foreign exchanges, NASDAQ national
market or in the over-the-counter market. It may invest in any industry sector,
although it will not concentrate in any one industry. From time to time, the
Fund may hold significant cash positions, consistent with its policy on
temporary investments, until suitable investment opportunities are available.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation, loan participations and trade claims, of debtor companies involved
in reorganization or financial restructuring, some of which may have very long
maturities. Some of the Indebtedness is illiquid.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of the Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Investment Manager may itself seek to influence or control
management or may cause the Fund to invest in other entities that purchase
securities for the purpose of influencing or controlling management, such as
investing in a potential takeover or leveraged buyout or investing in other
entities engaged in such practices.
CREDIT QUALITY. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
FOREIGN INVESTMENTS. Although the Fund reserves the right to purchase securities
in any foreign country, developed or undeveloped, the Fund's current investment
strategy is to invest primarily in domestic securities, with no more than
10%-15% of its total assets in foreign securities, including sponsored or
unsponsored Depositary Receipts. The Fund presently does not intend to invest
more than 5% of its assets in securities of developing markets including Eastern
European countries and Russia. Foreign investments may include both voting and
non-voting securities, sovereign debt and participation in foreign government
deals. The Fund's investments in foreign securities involve risks related to
currency fluctuations and political uncertainty. See "Common Risk Factors" below
and the SAI.
CURRENCY TECHNIQUES. The Fund generally expects to hedge against currency risks
to the extent that hedging is available. Currency hedging techniques may include
investments in foreign currency futures contracts, options on foreign currencies
or currency futures, forward foreign currency exchange contracts ("forward
contracts") and currency swaps, all of which involve specialized risks. See
"Common Risk Factors."
OTHER INVESTMENT POLICIES. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Common Securities and Investment Techniques,"
"Common Risk Factors," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase securities and debt
obligations on a "when-issued" or "delayed delivery" basis; invest in
collateralized mortgage obligations; borrow up to one-third of the value of its
total assets; invest in restricted or illiquid securities; purchase and sell
exchange-listed and over-the-counter put and call options on securities, equity
and fixed-income indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and engage in other activities
specifically identified for this Fund.
RISK CONSIDERATIONS
Mutual Shares Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it may invest in lower-rated debt obligations and foreign securities.
Stocks, and other equity securities representing an ownership interest in a
corporation, have historically outperformed other asset classes over the long
term, but tend to fluctuate more dramatically over the shorter term.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. Because of the Fund's policy of investing in lower
rated, higher risk debt obligations, an investment in the Fund is accompanied by
a higher degree of risk than is present with an investment in higher rated,
lower yielding obligations. Accordingly, investors considering the Fund should
evaluate their overall investment goals and tolerance for risk. See "Common Risk
Factors" and Appendix.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. Investments in
foreign developing markets involve heightened risks relating to the smaller size
and lesser liquidity of those markets. Investors should consider carefully the
substantial risks involved in investing in foreign securities, risks that are
heightened in developing markets. See "Common Risk Factors" below and in the
SAI.
PORTFOLIO MANAGEMENT
Mutual Shares Investments Fund
Franklin Mutual Advisers, Inc., 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078 is the Investment Manager. The Investment Manager manages the
Fund's assets and makes its investment decisions. The following persons are
primarily responsible for the day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996 and will
manage the Fund from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the Fund
from inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Fund from inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.60% of the average daily net assets of the
Fund.
TEMPLETON ASSET ALLOCATION FUND
EXPENSE SUMMARY
Templeton Asset Allocation Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 1 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Asset Allocation Fund - Class 1
For a Class 1 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Asset Allocation Fund -
Class 1. The information has been audited by McGladrey & Pullen, LLP, the
Trust's independent auditors. Their audit report for each of the last five
fiscal years, appears in the financial statements in the Trust's Annual Report
for the fiscal year ended December 31, 1997. The Trust's annual report also
includes more information about the Fund's performance. For a free copy, please
call 1-800-774-5001. [to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Asset Allocation Fund
The Templeton Asset Allocation Fund seeks a high level of total return through a
flexible policy of investing in the following market segments: stocks of
companies in any nation, debt securities of companies and governments of any
nation, and money market instruments. The mix of investments among these three
market segments will be adjusted in an attempt to capitalize on total return
potential produced by changing economic conditions throughout the world. The
Fund's Investment Manager may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
the management of the Fund's portfolio. There can be no assurance that the Fund
will achieve its investment objective.
There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments. Except as noted
below and under "Investment Restrictions" in the SAI, the Fund's Investment
Manager has complete flexibility in determining the amount and nature of stock,
debt securities or money market instruments in which the Fund may invest.
The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. It has the flexibility to invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount. The Fund may invest in medium
and lower quality debt securities that are rated between BBB and as low as D by
S & P, and between Baa and as low as C by Moody's or, if unrated, are of
equivalent investment quality as determined by the Investment Manager. As an
operating policy, which may be changed without shareholder approval, the Fund
will not invest more than 15% of its total assets in debt securities rated lower
than BBB by S & P or Baa by Moody's or, if unrated, are of equivalent
investment quality as determined by the Investment Manager. The Fund may, from
time to time, purchase defaulted debt securities if, in the opinion of the
Investment Manager, the issuer may resume interest payments in the near future
or other advantageous developments appear likely in the future. Consistent with
this limit the Fund will not invest more than 10% of its total assets in
defaulted debt securities, which may be illiquid. Bonds rated BB or lower,
commonly referred to as "junk bonds," are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and may be in default. See "Risk Considerations" for
this Fund, and "Common Risk Factors," below.
The Fund may invest in collateralized mortgage obligations and restricted
securities, lend its portfolio securities, and borrow up to 30% of the value of
its total assets for investment purposes. The Fund may purchase and sell
financial futures contracts, stock index futures contracts, and foreign currency
futures contracts for hedging purposes only and not for speculation. It may
engage in such transactions only if the total contract value of the futures
contracts does not exceed 20% of the Fund's total assets. The Fund may also
invest in forward foreign currency exchange contracts and options on foreign
currencies. These and other types of investments and investment techniques are
described in greater detail under "Common Securities and Investment Techniques"
in this Prospectus and in the SAI.
RISK CONSIDERATIONS
Templeton Asset Allocation Fund
The Fund carries the risks common to all stock and bond investments, plus
special risks due to its substantial investments in foreign securities. Stocks,
and other equity securities representing an ownership interest in a corporation,
have historically outperformed other asset classes over the long term, but tend
to fluctuate more dramatically over the shorter term. Bonds, and other debt
obligations, are affected by changes in interest rates and the creditworthiness
of their issuers.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets involve heightened risks related to
the smaller size and lesser liquidity of these markets. INVESTORS SHOULD
CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE
"COMMON RISK FACTORS."
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's (commonly referred to as "junk bonds");
however, the values of lower rated securities generally fluctuate more than
those of higher rated securities and involve greater risk of loss of income and
principal. SEE "COMMON RISK FACTORS," and the Appendix.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. The table
below shows the percentage of the Asset Allocation and Bond Funds' assets
invested in debt securities rated in each of the specific rating categories
shown and those that are not rated by the rating agency but deemed by the
Investment Managers to be of comparable credit quality. The information was
prepared based on a 12 month dollar weighted average of the portfolio
compositions in the fiscal year ended December 31, 1997. The Appendix to the SAI
includes a description of each rating category. [Asset Composition Table to be
supplied in B amendment]
PORTFOLIO MANAGEMENT
Templeton Asset Allocation Fund
The Investment Manager for the Templeton Asset Allocation Fund is Templeton
Investment Counsel, Inc.,("TICI") 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091. TICI manages the Fund's assets and makes its investment
decisions.
The lead portfolio manager of the fixed income portion of the Asset Allocation
Fund since 1993 is Thomas Latta, Vice President of Templeton Global Bond
Managers ("TGBM"), a division of TICI. Mr. Latta joined the Templeton
organization in 1991. He is the senior portfolio manager for developed markets
fixed income and has research responsibilities for the core European markets.
Mr. Latta is also responsible for internal fixed income systems development. Mr.
Latta began working in the securities industry in 1981. His experience includes
seven years with Merrill Lynch where he was part of an investment team to the
Saudi Arabian Monetary Authority in Riyadh, Saudi Arabia. While at Merrill
Lynch, Mr. Latta also acted as an advisor to investment managers concerning the
modeling and application of interest rate strategies in fixed income portfolios.
Neil Devlin exercises secondary portfolio management responsibilities with
respect to the fixed income portion of the Fund. Mr. Devlin, Executive Vice
President of TGBM, joined the Templeton organization in 1987. Prior to that
time, he was a portfolio manager and bond analyst with Constitutional Capital
Management of Boston, where he managed a portion of the Bank of New England's
pension money, a number of trust and corporate pension accounts, and began and
managed a mortgage-backed securities fund for the Bank. Before that, Mr. Devlin
was a bond trader and research analyst for the Bank of New England.
The lead portfolio manager for the equity portion of the Fund since 1995 is Gary
Clemons, Vice President of TICI. He is a research analyst with responsibility
for the financial services and telecommunications industry, as well as country
coverage of Argentina and Sweden. Prior to joining the Templeton organization in
1993, Mr. Clemons worked as a research analyst for Structured Asset Management
in New York, a subsidiary of Templeton International, where his duties included
management of a small capitalization fund. He holds an M.B.A. with an emphasis
on finance/investment banking from the University of Wisconsin and a B.S. from
the University of Nevada-Reno. Peter Nori and William T. Howard, Jr. exercise
secondary portfolio management responsibilities for the equity portion of the
Fund. Mr. Nori, Vice President of the Investment Manager, is a research analyst
whose current responsibilities include covering data processing/software,
textile and apparel stocks. Mr. Nori completed Franklin's management training
program before moving into portfolio research in 1990 as an equity analyst and
co-portfolio manager of the Franklin Convertible Securities Fund. He holds a
B.S. degree in Finance and an M.B.A. with an emphasis in finance from the
University of San Francisco. Mr. Howard holds a BA in international studies from
Rhodes College and an MBA in finance from Emory University. He is a Chartered
Financial Analyst and a member of the Financial Analyst Society. Before joining
the Templeton Organization in 1993, Mr. Howard was a portfolio manager and
analyst with the Tennessee Consolidated Retirement System in Nashville,
Tennessee, where he was responsible for research and management of the
international equity portfolio, and specialized in the Japanese equity market.
As a portfolio manager and research analyst with Templeton, Mr. Howard's
research responsibilities include the transportation, shipping, machinery and
engineering industries worldwide. He is also responsible for country coverage of
both Japan and New Zealand.
Management Fees
Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Asset Allocation Fund will pay its Investment Manager a monthly fee equal on an
annual basis to 0.65% of the Fund's average daily net assets up to $200 million,
0.585% of such net assets up to $1.3 billion, and 0.52% of such net assets over
$1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid ( )% and ()% of its
average daily net assets in management fees and total operating expenses
(including management fees), respectively.
TEMPLETON BOND FUND
EXPENSE SUMMARY
Templeton Bond Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 1 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Bond Fund -Class 1
For a Class 1 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Bond Fund - Class 1.
The information has been audited by McGladrey & Pullen, LLP, the Trust's
independent auditors. Their audit report for each of the last five fiscal years,
appears in the financial statements in the Trust's Annual Report for the fiscal
year ended December 31, 1997. The Trust's annual report also includes more
information about the Fund's performance. For a free copy, please call
1-800-774-5001. [to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Bond Fund
The Templeton Bond Fund's investment objective is high current income.
Consistent with this objective, the Fund may also consider the potential for
capital appreciation due to changes in interest rates, currency exchange rates
and credit quality when purchasing securities.
The Fund seeks to achieve its objective through a flexible policy of investing
primarily in debt securities of companies, governments and government agencies
of various nations throughout the world, and in debt securities which are
convertible into common stock of such companies. In pursuit of its investment
objective, the Fund will invest at least 65% of its assets in bonds and
debentures of such issuers. The Fund may invest in debt securities rated in any
category by Standard & Poor's Corporation ("S&P") or Moody's Investors Service,
Inc. ("Moody's") and securities which are unrated by any rating agency. See
"Common Risk Factors" and the Appendix in the Statement of Additional
Information for a description of the S&P and Moody's ratings. The Fund and its
investment manager, Templeton Global Bond Managers ("TGBM" or the "Investment
Manager"), a division of Templeton Investment Counsel, Inc. ("TICI"), may, from
time to time, use various methods of selecting securities for the Fund's
portfolio, and may also employ and rely on independent or affiliated sources of
information and ideas in connection with management of the Fund's portfolio.
There can be no assurance that the Fund will achieve its investment objective.
The average maturity of debt securities in the Fund's portfolio will fluctuate
depending upon TGBM's judgment as to future interest rate changes. Debt
securities in which the Fund may also invest include various corporate debt
obligations, structured investments, commercial paper, certificates of deposit,
bankers' acceptances, and repurchase agreements with respect to these
securities.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D by S&P, and between Baa and as low as C by Moody's
or, if unrated, are of equivalent investment quality as determined by the
Investment Manager. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future or other advantageous developments appear
likely in the future. The Fund will not invest more than 10% of its total assets
in defaulted debt securities, which may be illiquid. Bonds rated BB or lower,
commonly referred to as "junk bonds," are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and may be in default. See "Risk Considerations" for
this Fund, and "Common Risk Factors," below.
The Fund's portfolio turnover rate may generally exceed 100% per year, and was (
) % in 1997. The Fund's higher turnover rates are generally due to bond
maturities, and the rebalancing of the portfolio to keep interest rate risk and
country allocations at desired levels. Higher portfolio turnover rates generally
increase transaction costs, which are Fund expenses. See "Common Securities and
Investment Techniques," below.
The Fund may also buy and sell financial futures contracts, bond index futures
contracts, and foreign currency futures contracts. The Fund may purchase and
sell any of these futures contracts for hedging purposes only and not for
speculation. It may engage in such transactions only if the total contract value
of the futures contracts does not exceed 20% of the Fund's total assets. In
addition, the Fund may invest in forward foreign currency exchange contracts,
options on foreign currencies, depositary receipts, "when-issued" securities and
collateralized mortgage obligations, lend its portfolio securities, and borrow
up to 30% of the value of its total assets for investment purposes. These
investment techniques are discussed under "Common Securities and Investment
Techniques."
Certain types of investments and investment techniques are described in greater
detail under "Common Securities and Investment Techniques" in this Prospectus
and in the SAI.
RISK CONSIDERATIONS
Templeton Bond Fund
The Fund carries the risks common to all bond investments, plus special risks
because it invests primarily in foreign debt obligations, and may invest in
lower-rated debt obligations. Bonds, and other debt obligations, are affected by
changes in interest rates and the creditworthiness of their issuers. Foreign
securities, particularly in developing markets, are subject to special and
additional risks related to currency fluctuations, market volatility and
economic, social and political uncertainty. The Fund's investments in high
yield, lower-rated ("junk") bonds generally have greater price swings and credit
risk than higher-rated bonds. For more details about these and other risks,
please see "Common Securities and Investment Techniques" and "Common Risk
Factors," below.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. The table
below shows the percentage of the Asset Allocation and Bond Funds' assets
invested in debt securities rated in each of the specific rating categories
shown and those that are not rated by the rating agency but deemed by the
Investment Managers to be of comparable credit quality. The information was
prepared based on a 12 month dollar weighted average of the portfolio
compositions in the fiscal year ended December 31, 1997. The Appendix to the SAI
includes a description of each rating category. [Asset Composition Table to be
supplied in B amendment]
PORTFOLIO MANAGEMENT
Templeton Bond Fund
The Investment Manager for the Templeton Bond Fund is Templeton Investment
Counsel, Inc. ("TICI") 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091. TICI manages the Fund's assets and makes its investment decisions.
The lead portfolio manager of the Templeton Bond Fund since 1993 is Thomas
Latta, Vice President of TGBM. Mr. Latta joined the Templeton organization in
1991. He is the senior portfolio manager for developed markets fixed income and
has research responsibilities for the core European markets. Mr. Latta is also
responsible for internal fixed income systems development. Mr. Latta began
working in the securities industry in 1981. His experience includes seven years
with Merrill Lynch where he was part of an investment team to the Saudi Arabian
Monetary Authority in Riyadh, Saudi Arabia. While at Merrill Lynch, Mr. Latta
also acted as an advisor to investment managers concerning the modeling and
application of interest rate strategies in fixed income portfolios. Mr. Latta
attended the University of Missouri and New York University. Neil Devlin
exercises secondary portfolio management responsibilities with respect to the
Fund. Mr. Devlin, Executive Vice President of the Investment Manager, joined the
Templeton organization in 1987 and has managed the Fund since May 1996. Prior to
that time, he was a portfolio manager and bond analyst with Constitutional
Capital Management of Boston, where he managed a portion of the Bank of New
England's pension money, a number of trust and corporate pension accounts, and
began and managed a mortgage-backed securities fund for the Bank. Before that,
Mr. Devlin was a bond trader and research analyst for the Bank of New England.
Mr. Devlin holds a BA from Brandeis University. Ms. New an analyst with the
Investment Manager, joined the Templeton organization in 1993 and has managed
the Fund since May 1996. Prior to that time, she was an auditor with the
accounting firm of Deloitte and Touche.
Management Fees
For the fiscal year ended December 31, 1997, the Templeton Bond Fund paid ( )%
and ()% of its average daily net assets in management fees and total operating
expenses (including management fees), respectively.
TEMPLETON DEVELOPING MARKETS FUND
EXPENSE SUMMARY
Templeton Developing Markets Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 1 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Developing Markets Fund - Class 1
For a Class 1 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Developing Markets Fund
- -Class 1. The information has been audited by McGladrey & Pullen, LLP, the
Trust's independent auditors. Their audit report appears in the financial
statements in the Trust's Annual Report for the fiscal year ended December 31,
1997. The Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
[to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Developing Markets Fund
The investment objective of the Templeton Developing Markets Fund is long-term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in equity securities of issuers in countries having developing
markets. It is currently expected that under normal conditions at least 65% of
the Fund's total assets will be invested in developing market equity securities.
The Fund and its investment manager, Templeton Asset Management Ltd. (the
"Investment Manager"), may, from time to time, use various methods of selecting
securities for the Fund's portfolio, and may also employ and rely on independent
or affiliated sources of information and ideas in connection with management of
the Fund's portfolio. There can be no assurance that the Fund will achieve its
investment objective.
The Fund considers countries having developing markets to be all countries that
are generally considered to be developing or emerging countries by the
International Bank for Reconstruction and Development (more commonly referred to
as the World Bank) or the International Finance Corporation, as well as
countries that are classified by the United Nations or otherwise regarded by
their authorities as developing. Currently, the countries not included in this
category include Ireland, Spain, New Zealand, Australia, the United Kingdom,
Italy, the Netherlands, Belgium, Austria, France, Canada, Germany, Denmark, the
United States, Sweden, Finland, Norway, Japan, Iceland, Luxembourg and
Switzerland. In addition, as used in this Prospectus, developing market equity
securities means (i) equity securities of companies the principal securities
trading market for which is a developing market country, as defined above, (ii)
equity securities, traded in any market, of companies that derive 50% or more of
their total revenue from either goods or services produced in such developing
market countries or sales made in such developing market countries or (iii)
equity securities of companies organized under the laws of, and with a principal
office in, a developing market country. "Equity securities," as used in this
Prospectus, refers to common stock, preferred stock, warrants or rights to
subscribe to or purchase such securities and sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts").
Determinations as to eligibility will be made by the Investment Manager based on
publicly available information and inquiries made to the companies. (See "Common
Risk Factors" for a discussion of the nature of information publicly available
for non-U.S. companies.) The Fund will at all times, except during defensive
periods, maintain investments in at least three countries having developing
markets.
The Fund seeks to benefit from economic and other developments in developing
markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having developing markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
countries, particularly the emerging market countries which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature developing markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.
For capital appreciation, the Fund may invest up to 35% of its total assets in
debt securities (defined as bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits, bankers' acceptances and structured
investments). Certain debt securities can provide the potential for capital
appreciation based on various factors such as changes in interest rates,
economic and market conditions, improvement in an issuer's ability to repay
principal and pay interest, and ratings upgrades. Additionally, convertible
bonds offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bond to benefit from increases in the
market price of the securities into which they are convertible. The Fund may
invest in debt securities which are rated at least C by Moody's Investors
Service, Inc. ("Moody's") or C by Standard & Poor's Corporation ("S&P") or
unrated debt securities deemed to be of comparable quality by the Investment
Manager. As an operating policy, which may be changed without shareholder
approval, the Fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S & P or Baa by Moody's or, if unrated, are
of equivalent investment quality as determined by the Investment Manager. As a
fundamental policy (which may not be changed without shareholder approval) the
Fund will not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid. Bonds rated BB or lower, commonly referred to
as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. See "Common Risk Factors," and the Appendix,
below.
When the Investment Manager believes that market conditions warrant, the Fund
may adopt a temporary defensive position and may invest without limit in money
market securities denominated in U.S. dollars or in the currency of any foreign
country. See "Common Securities and Investment Techniques."
The Portfolio may invest up to 10% of its assets in securities of closed end
investment companies to facilitate foreign investment. The Fund may also lend
its portfolio securities; borrow up to one-third of the value of its total
assets for investment purposes (i.e., "leverage" its portfolio); purchase
convertible securities and warrants; invest in restricted or illiquid
securities; enter into transactions in options on securities, securities indices
and foreign currencies; enter into forward foreign currency contracts, and
futures contracts and related options. When deemed appropriate by the Investment
Manager, the Fund may invest cash balances in repurchase agreements and other
money market investments to maintain liquidity in an amount to meet expenses or
for day-to-day operating purposes. These investment techniques are described
below and under the heading "Investment Objective and Policies" in the SAI.
The Fund does not emphasize short-term trading profits and usually expects to
have an annual portfolio turnover rate not exceeding 50%.
RISK CONSIDERATIONS
Templeton Developing Markets Fund
The Fund carries the risks common to all stock investments, plus special risks
because it invests primarily in foreign developing markets securities. Stocks,
and other equity securities representing an ownership interest in a corporation,
have historically outperformed other asset classes over the long term, but tend
to fluctuate more dramatically over the shorter term.
Foreign securities are subject to special and additional risks related to
currency fluctuations, market volatility and economic, social and political
uncertainty. Foreign developing markets investments involve increased risks due
to the smaller size and lesser liquidity of those markets. AN INVESTMENT IN THE
FUND MAY BE CONSIDERED SPECULATIVE AND MAY NOT BE APPROPRIATE FOR SHORT-TERM
INVESTORS. INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL AND HEIGHTENED
RISKS INVOLVED IN INVESTING IN FOREIGN DEVELOPING MARKETS SECURITIES. For more
details about these and other risks, please see "Common Securities and
Investment Techniques" and "Common Risk Factors," below.
PORTFOLIO MANAGEMENT
Templeton Developing Markets Fund
The Investment Manager for the Developing Markets Fund is Templeton Asset
Management Ltd. ("Templeton Singapore"), 7 Temasek Boulevard, # 38-03, Suntec
Tower One, Singapore, 038987.
The following persons are primarily responsible for the day-to-day management of
the Developing Markets Fund's portfolio.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.
Dr. Mobius holds a Doctor of Philosophy degree in economics and political
science from the Massachusetts Institute of Technology. He earned his Bachelor's
and Master's degrees from Boston University. He is a member of several
industry-related associations. Dr. Mobius joined the Franklin Templeton Group in
1987 and has managed the Developing Markets Fund from inception.
H. Allan Lam
Portfolio Manager and Analyst
Templeton Asset Management Ltd.
Mr. Lam holds a Bachelor of Arts degree in accounting from Rutgers University.
He has had extensive auditing experience with Deloitte Touche & Tohmatsu and
KPMG Peat Marwick. He joined the Franklin Templeton Group in 1987 and has
managed the Developing Markets Fund from inception.
Tom Wu
Director, Portfolio Manager, and Analyst
Templeton Asset Management Ltd.
Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in economics from the
University of Hong Kong. Prior to joining the Franklin Templeton Group, in 1987,
he was a stockbroker at Vickers da Costa Hong Kong Ltd. He has managed the
Developing Markets Fund from inception.
Dennis Lim
Vice President, Portfolio Manager
Templeton Asset Management Ltd.
Mr. Lim holds a Master of Science degree in Management (Finance Analysis), from
the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter of
Wisconsin). He earned a Bachelor of Science degree in building engineering from
the National University of Singapore. Prior to joining the Franklin Templeton
Group, in 1990, he worked for the Government of Singapore's Ministry of National
Development. He has managed the Fund since February 1996.
Eddie Chow
Investment Analyst
Templeton Asset Management Ltd.
Mr. Chow holds a Master of Business Administration degree from the University of
Wisconsin-Milwaukee. Prior to joining the Franklin Templeton Group, in 1994, he
worked for many years in the finance and banking industry. He has managed the
Fund since February 1996.
Tek-Khoan Ong
Portfolio Manager
Templeton Asset Management Ltd.
Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, graduating with honors and on the director's list. He earned a Bachelor
of Science degree in computing science and a Bachelor of Science degree, with
honors, both from Imperial College, University of London, UK. Prior to joining
the Franklin Templeton Group, in 1993, he worked for the Monetary Authority of
Singapore (Singapore's central bank) for five years. He has managed the Fund
since February 1996.
Management Fees
For the fiscal year ended December 31, 1997, management fees, before any advance
waiver, totaled 1.25% of the Fund's average daily net assets. The fee paid by
the Fund is higher than the advisory fees paid by most other U.S. investment
companies primarily because investing in equity securities in developing
markets, which are not widely followed by professional analysts, requires the
Investment Manager to invest additional time and incur added expense in
developing specialized resources, including research facilities. During 1997,
the Fund paid management fees totaling ( )% of its average daily net assets.
Total operating expenses (including management fees) for the fiscal year ended
December 31, 1997 were ()% of daily net assets.
TEMPLETON INTERNATIONAL FUND
EXPENSE SUMMARY
Templeton International Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 1 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton International Fund - Class 1
For a Class 1 share outstanding throughout the periods indicated
This table summarizes the Templeton International Fund's financial history of
Templeton International Fund - Class 1. The information has been audited by
McGladrey & Pullen, LLP, the Trust's independent auditors. Their audit report
for each of the last five fiscal years, appears in the financial statements in
the Trust's Annual Report for the fiscal year ended December 31, 1997. The
Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
[to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton International Fund
The Templeton International Fund's investment objective is long-term capital
growth through a flexible policy of investing in stocks and debt obligations of
companies and governments outside the United States. In pursuit of its
investment objective, the Fund will invest at least 65% of its assets in
securities of issuers in at least three countries outside the United States. Any
income realized will be incidental.
The Fund will invest predominantly in equity securities issued by large-cap and
mid-cap companies. Large-cap companies are those which have market
capitalizations of $5 billion or more; mid-cap companies are those which have
market capitalizations of $1 billion to $5 billion. It may also invest to a
lesser degree in smaller capitalization companies, which may be subject to
different and greater risks. See "Common Risk Factors," below.
Although the Fund generally invests in common stock, it may also invest in
preferred stocks and certain debt securities such as convertible bonds. The Fund
may invest in medium and lower quality debt securities that are rated between
BBB and as low as D by S & P, and between Baa and as low as C by Moody's or, if
unrated, are of equivalent investment quality as determined by the Investment
Manager. As an operating policy, which may be changed without shareholder
approval, the Fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S & P or Baa by Moody's or, if unrated, are
of equivalent investment quality as determined by the Investment Manager. As a
fundamental policy (which may not be changed without shareholder approval) the
Fund will not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid. Bonds rated BB or lower, commonly referred to
as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. See "Common Risk Factors," and the Appendix,
below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bank time deposits in the currency of
any nation, bankers' acceptances, U.S. Government securities, corporate debt
obligations, and repurchase agreements with respect to these securities. The
Fund may also enter into firm commitment agreements, purchase securities on a
"when-issued" basis, invest in restricted securities, such as private
placements, lend its portfolio securities and borrow up to 30% of the value of
its total assets for investment purposes. See "Common Securities and Investment
Techniques." The Fund may purchase and sell financial futures contracts, stock
index futures contracts, and foreign currency futures contracts for hedging
purposes only and not for speculation. It may engage in such transactions only
if the total contract value of the futures contracts does not exceed 20% of the
Fund's total assets. See "Common Securities and Investment Techniques."
RISK CONSIDERATIONS
Templeton International Fund
The Fund carries the risks common to all stock investments, plus special risks
due to its substantial investments in foreign securities. Stocks, and other
equity securities representing an ownership interest in a corporation, have
historically outperformed other asset classes over the long term, but tend to
fluctuate more dramatically over the shorter term.
Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in smaller capitalization companies, which are subject to
different and greater risks. SEE "COMMON RISK FACTORS."
PORTFOLIO MANAGEMENT
Templeton International Fund
The Investment Manager for the Templeton International Fund is Templeton
Investment Counsel, Inc. ("TICI") 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091. TICI manages the Fund's assets and makes its investment
decisions.
The lead portfolio manager for the Templeton International Fund since July 1996
is Peter Nori. Mr. Nori, Vice President of TICI, completed Franklin's management
training program before moving into portfolio research in 1990 as an equity
analyst and co-portfolio manager of the Franklin Convertible Securities Fund. He
has exercised secondary portfolio management responsibilities for the Fund since
1995. Mr. Nori's current responsibilities include covering the data
processing/software, textile and apparel stocks, steel stocks and country
coverage of Austria. He holds a B.A. degree in Finance and an M.B.A. with an
emphasis in finance from the University of San Francisco and is a Chartered
Financial Analyst. Gary Motyl exercises secondary portfolio management
responsibilities. Mr. Motyl, Executive Vice President and Director of TICI, has
been a security analyst and portfolio manager with TICI since 1981. His research
responsibilities include the global automobile industry and country coverage of
Germany. Prior to joining the Templeton organization, Mr. Motyl worked from 1974
to 1979 as a security analyst with Standard & Poor's Corporation, and from 1979
to 1981 was a research analyst and portfolio manager with Landmark First
National Bank. Mr. Motyl holds a B.S. degree in Finance from Lehigh University
and an M.B.A. from Pace University and is a Chartered Financial Analyst.
Management Fees
Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid ( )% and ()% of its
average daily net assets in management fees and total operating expenses
(including management fees), respectively.
TEMPLETON MONEY MARKET FUND
EXPENSE SUMMARY
Templeton Money Market Fund
This table is designed to help you understand the costs of investing in shares
of the Fund. Except as indicated below, it is based on the historical expenses
of the shares for the fiscal year ended December 31, 1997. The Fund's actual
expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's shares is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $1,000 that you invest in the Fund. [to be
supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Money Market Fund
For a share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Money Market Fund. The
information has been audited by McGladrey & Pullen, LLP, the Trust's independent
auditors. Their audit report for each of the last five fiscal years, appears in
the financial statements in the Trust's Annual Report for the fiscal year ended
December 31, 1997. The Trust's annual report also includes more information
about the Fund's performance. For a free copy, please call 1-800-774-5001. [to
be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Money Market Fund
The investment objective of the Fund is current income, stability of principal,
and liquidity, which it seeks to achieve by investing in money market
instruments with maturities not exceeding 397 days, consisting primarily of
short term U.S. Government securities, certificates of deposit, time deposits,
bankers' acceptances, commercial paper, and repurchase agreements with banks or
broker-dealers with respect to these securities. As a fundamental policy, the
Fund invests at least 80% of its total assets in these securities. There can be
no assurance that the investment objective of the Fund will be attained.
The Fund intends to use its best efforts to maintain its net asset value at
$1.00 per Share, although there can be no assurance that this will be achieved.
The Fund values all of its portfolio securities using the amortized cost method,
which involves valuing a security at cost on the date of acquisition and
thereafter assuming a constant accretion of discount or amortization of premium.
See "Purchase, Redemption and Pricing of Shares" in the SAI for a description of
certain conditions and procedures followed by the Fund in connection with
amortized cost valuation. Certain of those conditions and procedures are
summarized below.
In accordance with Rule 2a-7, the Fund is required to (i) maintain a
dollar-weighted average portfolio maturity of 90 days or less; (ii) purchase
only instruments having remaining maturities of 397 days or less; and (iii)
invest only in U.S. dollar denominated securities determined in accordance with
procedures established by the Board of Trustees to present minimal credit risks
and which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated by only
one such organization, subject to ratification of the investment by the Board of
Trustees). If a security is unrated, it must be of comparable quality as
determined in accordance with procedures established by the Board of Trustees,
including approval or ratification of the security by the Board except in the
case of U.S. Government securities.
In addition, the Fund will not invest more than 5% of its total assets in the
securities (including the securities collateralizing a repurchase agreement) of,
or subject to puts issued by, a single issuer, except that (i) the Fund may
invest in U.S. Government securities or repurchase agreements that are fully
collateralized by U.S. Government securities without any such limitation, and
(ii) the limitation with respect to puts does not apply to unconditional puts if
no more than 10% of the Fund's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board of
Trustees to be comparable to those rated in the highest category, will be
limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000.
The Fund may invest in dollar-denominated obligations of foreign branches of
domestic banks ("Eurodollar obligations") and dollar-denominated obligations of
domestic branches of foreign banks ("Yankee obligations"). These investments may
involve risks that are different in some respects from investments in
obligations of domestic branches of domestic banks. Such investment risks may
include future political and economic developments, the possible imposition of
withholding taxes on interest income payable on the Eurodollar and Yankee
obligations held by the Fund, possible seizure or nationalization, and the
possible establishment of exchange controls or the adoption of other foreign
government laws and restrictions applicable to the payment of Eurodollar and
Yankee obligations which might adversely affect the payment of principal and
interest.
Commercial paper must be issued by domestic corporations or foreign corporations
affiliated with domestic corporations and must meet the quality standards
described under "Common Securities and Investment Techniques." The Fund may also
enter into repurchase agreements, invest in short term corporate debt
obligations, purchase securities on a "when-issued" basis, lend its portfolio
securities, and borrow up to 5% of its total assets for temporary or emergency
purposes. The Fund will not invest more than 10% of its assets in time deposits
maturing in more than seven days which do not have secondary trading markets and
which are subject to early withdrawal penalties. See "Common Securities and
Investment Techniques." Certain types of investments and investment techniques
are described in greater detail under "Common Securities and Investment
Techniques" in this Prospectus and also in the SAI.
RISK CONSIDERATIONS
Templeton Money Market Fund
The Fund will seek to maintain a $1.00 per share net asset value, but there is
no guarantee that it will do so.
PORTFOLIO MANAGEMENT
Templeton Money Market Fund
The Investment Manager of the Fund is Templeton Global Bond Managers, a division
of Templeton Investment Counsel, Inc. TICI is a Florida corporation with offices
at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091. TICI manages
the Fund's assets and makes its investment decisions.
For the fiscal year ended December 31, 1997, the Fund paid __% of its average
daily net assets in management fees.
TEMPLETON STOCK FUND
EXPENSE SUMMARY
Templeton Stock Fund - Class 1
This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 1 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Stock Fund - Class 1
For a Class 1 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Stock Fund - Class 1.
The information has been audited by McGladrey & Pullen, LLP, the Trust's
independent auditors. Their audit report for each of the last five fiscal years,
appears in the financial statements in the Trust's Annual Report for the fiscal
year ended December 31, 1997. The Trust's annual report also includes more
information about the Fund's performance. For a free copy, please call
1-800-774-5001. [to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Stock Fund
The Templeton Stock Fund's investment objective is capital growth through a
policy of investing primarily in common stocks issued by companies, large and
small, in various nations throughout the world. In the pursuit of its investment
objective, the Fund will normally maintain at least 65% of its assets in common
and preferred stocks. The Fund may also invest in securities convertible into
common stocks rated in any category by Standard & Poor's Corporation ("S&P") or
Moody's Investors Service, Inc. ("Moody's") and securities which are unrated by
any rating agency. See the Appendix in the Statement of Additional Information
for a description of the S&P and Moody's ratings. Current income will usually be
a less significant factor in selecting investments for the Fund. The Fund will
invest predominantly in equity securities issued by large-cap and mid-cap
companies. Large-cap companies are those which have market capitalizations of $5
billion or more; mid-cap companies are those which have market capitalizations
of $1 billion to $5 billion. It may also invest to a lesser degree in smaller
capitalization companies, which may be subject to different and greater risks.
See "Common Risk Factors," below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
Subject to its policy of investing 65% of its total assets in equity securities,
the Fund may invest in debt obligations, including convertible debt obligations.
These debt obligations may include medium and lower quality debt securities that
are rated between BBB and as low as D by S & P, and between Baa and as low as C
by Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. As an operating policy, which may be changed without
shareholder approval, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S & P or Baa by Moody's or, if
unrated, are of equivalent quality as determined by the Investment Manager. As a
fundamental policy (which may not be changed without shareholder approval) the
Fund will not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid. Bonds rated BB or lower, commonly referred to
as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. See "Common Risk Factors," and the Appendix,
below.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bankers' acceptances, U.S. Government
securities, corporate debt obligations, and repurchase agreements with respect
to these securities. The Fund may also enter into firm commitment agreements,
purchase securities on a "when-issued" basis, invest in restricted securities,
such as private placements, borrow up to 30% of the value of its total assets
for investment purposes and lend its portfolio securities. (See "Common
Securities and Investment Techniques.") The Fund may also purchase and sell
stock index futures contracts for hedging purposes only and not for speculation.
It may engage in such transactions only if the total contract value of the
futures contracts does not exceed 20% of the Fund's total assets. (See "Common
Securities and Investment Techniques.")
RISK CONSIDERATIONS
Templeton Stock Fund
The Fund carries the risks common to all stock investments, plus special risks
due to its substantial investments in foreign securities. Stocks, and other
equity securities representing an ownership interest in a corporation, have
historically outperformed other asset classes over the long term, but tend to
fluctuate more dramatically over the shorter term.
Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in smaller capitalization companies, which are subject to
different and greater risks. SEE "COMMON RISK FACTORS."
PORTFOLIO MANAGEMENT
Templeton Stock Fund
The Investment Manager for the Templeton Stock Fund is Templeton Investment
Counsel, Inc.,("TICI") 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091. TICI manages each Fund's assets and makes its investment decisions.
The lead portfolio manager for the Templeton Stock Fund since 1995 is Mark R.
Beveridge. Mr. Beveridge, Vice President of TICI, joined the Templeton
organization in 1985. He has responsibility for the industrial component
appliances/ household durables industries, and has market coverage of Argentina,
Denmark and Thailand. Prior to joining the Templeton organization, Mr. Beveridge
was a principal with a financial accounting software firm based in Miami,
Florida. He has a Bachelors Degree in Business Administration with emphasis in
finance from the University of Miami.
William T. Howard Jr., Vice President of TICI and Howard J. Leonard, Senior Vice
President of TICI, exercise secondary portfolio management responsibilities. Mr.
Howard holds a BA in international studies from Rhodes College and an MBA in
finance from Emory University. He is a Chartered Financial Analyst and a member
of the Financial Analyst Society. Before joining the Templeton Organization in
1993, Mr. Howard was a portfolio manager and analyst with the Tennessee
Consolidated Retirement System in Nashville, Tennessee, where he was responsible
for research and management of the international equity portfolio, and
specialized in the Japanese equity market. As a portfolio manager and research
analyst with Templeton, Mr. Howard's research responsibilities include the
transportation, shipping, machinery and engineering industries worldwide. He is
also responsible for country coverage of both Japan and New Zealand. He has
managed the Fund since June 1996. Mr. Leonard has research responsibilities for
the global forest products, money management and airline industries, and
coverage of Indonesia, Switzerland, Brazil and India. Prior to joining the
Templeton organization in 1989, Mr. Leonard was director of investment research
at First Pennsylvania Bank, where he was responsible for equity and fixed income
research activities and its proxy voting service for large pension plan
sponsors. He also previously worked at Provident National Bank as a security
analyst. Mr. Leonard holds a B.B.A. in Finance and Economics from Temple
University.
Management Fees
Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid 0.47% and ()% of its
average daily net assets in management fees and total operating expenses
(including management fees) respectively.
COMMON SECURITIES AND INVESTMENT TECHNIQUES
This section describes certain types of securities and investment techniques
which can be used by more than one Fund. All policies and percentage limitations
are considered at the time of purchase and refer to total assets, unless
otherwise specified. Each of the Funds will not necessarily use the strategies
described to the full extent permitted unless the Managers believe that doing so
will help a Fund reach its objectives, and not all instruments or strategies
will be used at all times. In the event of a corporate restructuring or
bankruptcy reorganization of an issuer whose securities are owned by a Fund, the
Fund may receive securities different from those originally purchased, e.g.,
common stock that is not dividend paying, bonds with a lower coupon or more
junior status, convertible securities or even conceivably real estate. The Fund
is not obligated to sell such securities immediately, if the Manager believes,
based on its own analysis, that the longer term outlook is favorable and there
is the potential for a higher total return by holding such investments.
Each Fund is also subject to investment restrictions that are described under
the heading "Investment Restrictions" in the SAI. Those investment restrictions
so designated and the investment objective of each Fund are "fundamental
policies" of each Fund, which means that they may not be changed without a
majority vote of Shareholders of the Fund. With the exception of a Fund's
investment objective and those restrictions specifically identified as
fundamental, all investment policies and practices described in this Prospectus
and in the SAI are not fundamental, meaning that the Board of Trustees may
change them without Shareholder approval.
Borrowing
Under federal securities laws, a Fund may borrow from banks only, and is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on each Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
Convertible Securities
With the exception of the Money Market Fund, all Funds may invest in convertible
securities. A convertible security is generally a debt obligation or preferred
stock that may be converted within a specified period of time into a certain
amount of common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when interest
rates decline and decrease in value when interest rates rise. Similar to a
common stock, the value of a convertible security tends to increase as the
market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The convertible debt
obligations in which a Portfolio may invest are subject to the same rating
criteria and investment policies as that Portfolio's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for each Portfolio's financial reporting, credit
rating, and investment limitation purposes.
Certain Funds, consistent with their investment policies, may also invest in
enhanced or synthetic convertible securities. A detailed discussion of these
securities appears in the SAI. None of the Funds currently expects to make
significant use of these securities.
Debt Securities
Debt securities may include many types of debt obligations of both domestic and
foreign issuers such as bonds, debentures, notes, commercial paper, structured
investments and obligations issued or guaranteed by governments or government
agencies or instrumentalities. The market value of debt securities generally
varies in response to changes in interest rates and the financial condition of
each issuer. During periods of declining interest rates, the value of debt
securities generally increases. Conversely, during periods of rising interest
rates, the value of such securities generally declines. These changes in market
value will be reflected in the Fund's net asset value.
Each Fund's policy regarding investments in lower-rated debt obligations is
stated above. Lower-rated debt obligations, commonly known as "junk bonds," are
rated below BBB by Moody's or Baa by S & P, or in unrated debt obligations of
similar quality as determined by the Investment Manager. Bonds rated BB or below
are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
may be in default.
Issuers of bonds rated Ca may often be in default. Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by each Fund's Investment Manager to determine that the
planned investment is sound. Unrated debt securities are not necessarily of
lower quality than rated securities but they may not be attractive to as many
buyers. Many debt obligations of foreign issuers, and especially developing
markets issuers, are either (i) rated below investment grade or (ii) not rated
by U.S. rating agencies so that their selection depends on the Investment
Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption
"Common Risk Factors" and in the SAI. For a description of debt securities
ratings, see the Appendix.
BANK OBLIGATIONS. All Funds may invest in certificates of deposit, which are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. The Funds may invest
in bankers' acceptances, which are negotiable drafts or bills of exchange
normally drawn by an importer or exporter to pay for specific merchandise and
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity. The
Funds may invest in dollar-denominated certificates of deposit and bankers'
acceptances of foreign and domestic banks having total assets in excess of $1
billion. The Funds may also invest in certificates of deposit of federally
insured savings and loan associations having total assets in excess of $1
billion. Certain Funds may also hold cash and time deposits with banks in the
currency of any major nation.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). Certain Funds may invest in CMOs,
which are fixed-income securities collateralized by pools of mortgage loans
created by commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other issuers in the United States.
In effect, CMOs "pass-through" the monthly payments made by individual borrowers
on their mortgage loans. Timely payment of interest and principal (but not the
market value) of these pools is supported by various forms of insurance or
guarantees issued by U.S. Government agencies, private issuers, and mortgage
poolers; however, the obligation itself is not guaranteed. If the collateral
securing the obligations is insufficient to make payment on the obligation, a
holder could sustain a loss. In addition, a Fund may buy CMOs without insurance
or guarantees if, in the opinion of the Investment Manager, the sponsor is
creditworthy. The ratings of the CMOs will be consistent with the ratings
criteria of the Fund. Prepayments of the mortgages included in the mortgage pool
may influence the yield of the CMO. Prepayments usually increase when interest
rates are decreasing, thereby decreasing the life of the pool. Reinvestment of
prepayments may be at a lower rate than that on the original CMO. As a result,
the value of CMOs decrease like other debt securities when interest rates rise,
but when interest rates decline, they may not increase as much as other debt
securities, due to the prepayment feature.
COMMERCIAL PAPER. All Funds may invest in commercial paper. Investments in
commercial paper are limited to obligations rated Prime-1 or Prime-2 by Moody's
or A-1 or A-2 by S&P or, if not rated by Moody's or S&P, issued by companies
having an outstanding debt issue currently rated Aaa or Aa by Moody's or AAA or
AA by S&P. See the Appendix in the SAI for a description of these ratings.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government securities,
which are obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. Some U.S. Government securities, such as Treasury bills
and bonds, which are direct obligations of the U.S. Treasury, and Government
National Mortgage Association ("GNMA") certificates, the principal and interest
of which the Treasury guarantees, are supported by the full faith and credit of
the Treasury; others, such as those of Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others are supported only by the credit of the instrumentality. GNMA
certificates are securities representing part ownership of a pool of mortgage
loans on which interest and principal payments are guaranteed by the Treasury.
Principal is repaid monthly over the term of the loan. Expected payments may be
delayed due to the delays in registering newly traded certificates. The mortgage
loans will be subject to normal principal amortization and may be prepaid prior
to maturity. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates.
Depositary Receipts
Each Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a United States corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of each
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
Diversification
Each Fund is diversified under federal securities law and may not, with respect
to 75% of its total assets, purchase the securitei of any one issuer (other than
the U.S. Government) if more than 5% of the value of the Fund's assets would be
invested in such issuer. Each Fund will also comply with diversification
requirements under federal tax laws related to regulated investment companies
and variable contracts issued by insurance companies. See "Federal Income Tax
Status," below and "Investment Objectiv es and Policies" in the SAI.
Forward Foreign Currency Exchange Contracts and Options on Foreign Currencies
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage each Fund's exposure to various
currencies to take advantage of different yield, risk, and return
characteristics that different currencies, currency denominations, and countries
can provide for U.S. investors. With respect to debt securities, the Investment
Managers, may from time to time make extensive use of forward currency exchange
contracts or options on currencies for hedging purposes.
A Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. The Fund will generally not enter into a forward contract
with a term of greater than one year. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers.
Each Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security or, when the Investment Manager believes that the currency
of a particular foreign country may suffer or enjoy a substantial movement
against another currency, it may enter into a forward contract to sell or buy
the former foreign currency (or another currency which acts as a proxy for that
currency) approximating the value of some or all of a Fund's portfolio
securities denominated in such foreign currency. This latter investment practice
is generally referred to as "cross-hedging." A Fund has no specific limitation
on the percentage of assets it may commit to forward contracts, except that a
Fund will not enter into a forward contract if the amount of assets set aside to
cover the contract would impede portfolio management or the Fund's ability to
meet redemption requests. Each Fund may also purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases in the
U.S. dollar cost of foreign securities to be acquired. There is no assurance
that the Investment Managers' hedging strategies will be successful.
Futures Contracts
For hedging purposes only, certain Funds may buy and sell financial futures
contracts and foreign currency futures contracts. Also, for hedging purposes
only, the Funds may purchase and sell bond index futures contracts. A financial
futures contract is an agreement between two parties to buy or sell a specified
debt security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When a Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. A Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, a Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account, for all Funds must be equal to the daily market value of all
outstanding futures contracts less any amounts deposited as margin. The value of
the underlying securities on which futures contacts will be written at any one
time will not exceed 25% of the total assets of the Developing Markets Fund.
Loans of Portfolio Securities
Each Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. Each Fund may terminate the loans at any time
and obtain the return of the securities loaned within five business days. A Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, a Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
Portfolio Turnover
Each Fund may purchase and sell securities without regard to the length of time
the security has been held, and the frequency of Portfolio transactions
(turnover rate) will vary from year to year, depending on market conditions.
Portfolio turnover could be greater in periods of unusual market movement and
volatility. The Managers will weigh the potential benefits of any short-term
trading against the higher transaction costs associated with a higher turnover
rate. Unless otherwise indicated in the discussion for each Fund, it is
anticipated that each Fund's annual turnover rate generally will not exceed
100%.
Higher portfolio turnover rates generally increase transaction costs, which are
Portfolio expenses, but would not create capital gains for investors because of
the tax-deferred status of variable annuity and variable life insurance
investments. Portfolio turnover rates for recent years are shown in the
"Financial Highlights." More information is in the SAI.
Repurchase Agreements
Each Fund may invest in repurchase agreements. When a Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security, a
Fund may experience delay or difficulty in exercising its rights to realize upon
the security and might incur a loss if the value of the security should decline,
as well as incur disposition costs in liquidating the security.
Restricted Securities
Certain Funds may invest in restricted securities, which are securities subject
to legal or contractual restrictions on their resale, such as private
placements. Such restrictions might prevent the sale of restricted securities at
a time when sale would otherwise be desirable. No restricted securities and no
securities for which there is not a readily available market ("illiquid assets")
will be acquired by a Fund if such acquisition would cause the aggregate value
of illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
Temporary Investments
For temporary defensive purposes, each Fund may invest up to 100% of its total
assets in the following money market securities, denominated in U.S. dollars or
in the currency of any foreign country, issued by entities organized in the
United States or any foreign country: short-term (less than twelve months to
maturity) and medium-term (not greater than five years to maturity) obligations
issued or guaranteed by the U.S. Government or the governments of foreign
countries, their agencies or instrumentalities; finance company and corporate
commercial paper, and other short-term corporate obligations, in each case rated
Prime-1 by Moody's or A or better by S&P or, if unrated, of comparable quality
as determined by the Investment Manager; obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks; and repurchase
agreements with banks and broker-dealers with respect to such securities.
Trade Claims
Trade claims are purchased from creditors of companies in financial difficulty.
For purchasers such as a Portfolio, trade claims offer the potential for profits
since they are often purchased at a significantly discounted value and,
consequently, may generate capital appreciation if the value of the claim
increases as the debtor's financial position improves. If the debtor is able to
pay the full obligation on the face of the claim as a result of a restructuring
or an improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price. An investment in trade claims is
speculative and carries a high degree of risk. There can be no guarantee that
the debt issuer will ever be able to satisfy the obligation on the trade claim.
Trade claims are not regulated by federal securities laws or the SEC. Currently,
trade claims are regulated primarily by bankruptcy laws. Because trade claims
are unsecured, holders may have a lower priority in terms of payment than most
other creditors in a bankruptcy proceeding.
Warrants
A warrant is typically a long-term option issued by a corporation which gives
the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
an expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If a Portfolio does not exercise or dispose of a
warrant prior to its expiration, it will expire worthless.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" basis. New issues of
certain debt securities are often offered on a when-issued basis, meaning that
the payment obligation and the interest rate are fixed at the time the buyer
enters into the commitment, but delivery and payment for the securities normally
takes place after the date of the commitment to purchase. The value of
when-issued securities may vary prior to and after delivery depending on market
conditions and changes in interest rate levels. However, a Fund will not accrue
any income on these securities prior to delivery. The Funds will maintain in a
segregated account with their Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
COMMON RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds; nor can
there be any assurance that a Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Funds can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Funds' portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of each Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which a Fund is invested in equity
securities may also be reflected in declines in the price of the Shares of the
Fund. Changes in prevailing rates of interest in any of the countries in which a
Fund is invested in fixed income securities will likely affect the value of such
holdings and thus the value of the Funds' Shares. Increased rates of interest
which frequently accompany inflation and/or a growing economy are likely to have
a negative effect on the value of a Fund's Shares. In addition, changes in
currency valuations will affect the price of Shares of the Funds.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Managers will not always be
profitable or prove to have been correct. The Funds are not intended to be
complete investment programs.
Foreign Securities
The Funds are authorized to purchase securities in any foreign country,
developed or underdeveloped. An investor should consider carefully the risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. These risks are often heightened for investments in developing
markets, including certain Eastern European countries. See "Investment
Objectives and Policies--Risk Factors" in the SAI. There is the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations (including, for example, withholding taxes on interest
and dividends) or other taxes imposed with respect to investments in foreign
nations, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), foreign investment controls on daily
stock movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Funds may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security of, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
As a non-fundamental policy, the Funds will limit their investments in Russian
securities to 5% of their total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss (including risk of total loss)
arising out of Russia's system of share registration and custody. For more
information on these risks and other risks associated with Russian securities,
please see "Investment Objectives and Policies--Risk Factors" in the SAI.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Funds may
invest may also be smaller, less liquid, and subject to greater price volatility
than those in the United States. The Funds may invest in Eastern European
countries, which involves special risks that are described under "Investment
Objectives and Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
The Funds will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when a Fund converts assets from one currency to another.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. A Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
Hong Kong reverted to the sovereignity of China on July 1, 1997. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of a Fund's investments.
Closed-End Investment Companies
Some countries, such as South Korea, Chile and India, have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. Subject to federal securities laws, certain
Funds which are authorized to invest in developing markets securities, may
invest in securities of closed-end investment companies. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares of
closed-end investment companies, Shareholders would bear both their
proportionate share of expenses of the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
Lower Rated Debt Obligations
Certain Funds are authorized to invest in medium quality or high-risk, lower
quality debt securities that are rated between BBB and as low as D by S&P, and
between Baa and as low as C by Moody's or, if unrated, are of equivalent
investment quality as determined by the Investment Manager. See "Investment
Objectives and Policies--Debt Securities" in the SAI for descriptions of debt
securities rated lower than BBB by S&P and Baa by Moody's.
High-risk, lower quality debt securities commonly referred to as "junk bonds,"
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and may be in default. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and the Funds' ability to dispose of particular issues, when
necessary, to meet a Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for a Fund to obtain market
quotations based on actual trades for purposes of valuing the Funds' portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. Investments may also be evaluated in the context of economic
and political conditions in the issuer's domicile, such as the inflation rate,
growth prospects, global trade patterns and government policies. In the event
the rating on an issue held in a Fund's portfolio is changed by the rating
service, such change will be considered by a Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. If a Fund
had a 12 month dollar weighted average of more than 5% of its assets invested in
debt obligations below investment grade in the most recent fiscal year, an Asset
Composition Table is included under the Fund's "Risk Considerations," above.
Small Capitalization Issuers
Certain Funds may invest in companies with relatively small revenues and limited
product lines. Smaller capitalization companies may lack depth of management,
they may be unable to internally generate funds necessary for growth or
potential development or to generate such funds through external financing on
favorable terms. Due to these and other factors, smaller companies may suffer
significant losses, as well as realize substantial growth.
Options and Futures Contracts
Successful use of forward contracts, options and futures contracts are subject
to special risk considerations and transaction costs. A liquid secondary market
for forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in a
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of a Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, a Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 1 shares of each Fund are offered on a continuous basis at their net asset
value only to separate accounts ("Separate Accounts") of insurance companies
("Insurance Companies") to serve as the underlying investment vehicle for both
variable annuity and variable life insurance contracts ("Contracts").
Individuals may not purchase these shares directly from each Fund. Please read
the prospectus of the Insurance Company Separate Account for more information on
the purchase of each Fund's Class 1 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
Insurance Company and other variable contracts of unaffiliated Insurance
Companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between Separate Accounts of different
Insurance Companies, as the case may be, and will determine what action, if any,
should be taken in the event of such a conflict. Although the Trust does not
currently foresee any disadvantages to contract owners, an irreconcilable
material conflict may conceivably arise between contract owners of different
separate accounts investing in the Funds due to differences in tax treatment,
the management of investments, or other considerations. If such a conflict were
to occur, one of the Separate Accounts might withdraw its investment in a Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 1 shares of a Fund may be
subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of a Fund is determined as of the
close of the New York Stock Exchange ("NYSE"), normally generally 4:00 p.m.,
Eastern time. The Net Asset Value of all outstanding shares of each class of a
Fund is calculated on a pro rata basis. It is based on each class' proportionate
participation in a Fund, determined by the value of the shares of each class. To
calculate the Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares of the class outstanding. The assets
in a Fund's portfolio are valued as described under "Purchase, Redemption and
Pricing of Shares" in the SAI.
REDEMPTION OF SHARES
The Trust will redeem all full and fractional Shares presented for redemption on
any business day. Redemptions are effected at the per Share net asset value next
determined after receipt of proper notice of the redemption. Redemption proceeds
normally will be paid to the Insurance Company within seven days following
receipt of instructions in proper form. The right of redemption may be suspended
by the Trust when the NYSE is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the Securities and Exchange Commission,
making disposal of portfolio securities or valuation of net assets not
reasonably practicable, and whenever the Securities and Exchange Commission has
by order permitted such suspension or postponement for the protection of
shareholders. The Trust will redeem Shares of a Fund solely in cash up to the
lesser of $250,000 or 1% of its net assets during any 90-day period for any one
Shareholder. In consideration of the best interests of the remaining
Shareholders, the Trust reserves the right to pay any redemption price exceeding
this amount in whole or in part by a distribution in kind of securities held by
a Fund in lieu of cash. It is highly unlikely that Shares would ever be redeemed
in kind. If Shares are redeemed in kind, however, the redeeming Shareholder
should expect to incur transaction costs upon the disposition of the securities
received in the distribution.
Please refer to the prospectus of your Insurance Company's Separate Account for
information on how to redeem Shares of a Fund.
EXCHANGES
Class 1 shares of a Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one
class or fund and a purchase of shares of one or more of the other classes or
funds and are effected at the respective net asset value per share of the class
of each fund on the date of the exchange. Please refer to the prospectus of your
Insurance Company's Separate Account for more information concerning exchanges.
MANAGEMENT OF THE TRUST
The Board
The Board oversees the management of the Trust and elects its officers. The
officers are responsible for each Fund's day-to-day operations. The Board also
monitors each Fund to ensure no material conflicts exist among the classes of
shares. While none is expected, the Board will act appropriately to resolve any
material conflict that may arise.
Investment Managers
Each Fund's Investment Manager also performs similar services for other funds.
Each Fund's Investment Manager is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together the Investment Managers and their affiliates manage over
$179 billion in assets. The Templeton organization has been investing globally
since 1940. TICI and its affiliates have offices in Argentina, Australia,
Bahamas, Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland,
Russia, Scotland, Singapore, South Africa, U.S., and Vietnam. Please see
"Investment Management and Other Services" and "Brokerage Allocation" in the SAI
for information on securities transactions and a summary of the Trust's Code of
Ethics.
Administrative Services
Templeton Funds Annuity Company ("Administrator"), 700 Central Avenue, St.
Petersburg, Florida 33701, telephone (800) 774-5001 or (813) 823-8712, provides
certain administrative services and facilities for each Fund.
The Administrator receives a monthly fee equivalent on an annual basis to 0.15%
of the average daily net assets of the Trust, reduced to 0.135% of such assets
in excess of $200 million, to 0.10% of such assets in excess of $700 million,
and to 0.075% of such assets in excess of $1.2 billion. Each Fund in the Trust,
except those which had not commenced operations, paid the Administrator fees of
( )% of its average daily net assets during the fiscal year ended December 31,
1997.
Portfolio Transactions
Each Investment Manager tries to obtain the best execution on all transactions.
If an Investment Manager believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
Distributor
The Trust's principal underwriter is Franklin Templeton Distributors, Inc., 700
Central Avenue, St. Petersburg, Florida 33701, toll free telephone (800)
292-9293.
DIVIDENDS AND DISTRIBUTIONS
Each Fund, except the Money Fund, normally intends to pay annual dividends
representing substantially all of its net investment income and to distribute
annually any net realized capital gains. Dividends and capital gains are
calculated and distributed the same way for each Fund and each class of shares.
The amount of any income dividends per share will differ for each class,
however, generally due to the difference in the applicable Rule 12b-1 fees.
Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Funds will be automatically reinvested in
additional Shares of the same class of the Funds, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Funds will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Funds so qualify,
they generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, each Fund must, among other things, meet certain source of income
requirements. In addition, each Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of each Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Funds on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Funds.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by a Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from a Fund's investment company
taxable income or net capital gain may be characterized as a return of capital
to shareholders or, in some cases, as capital gain. Reference is made to the
prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code a Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that a Fund will be able to operate as currently described in the Prospectus, or
that the Trust will not have to change the Funds, investment objective or
investment policies. While a Fund's investment objective is fundamental and may
be changed only by a vote of a majority of its outstanding Shares, the Trustees
have reserved the right to modify the investment policies of the Funds as
necessary to prevent any such prospective rules and regulations from causing the
contract owners to be considered the owners of the Shares of the Fund underlying
the Separate Account.
OTHER INFORMATION
The Trust's Organization
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of ten separately managed funds. Each class of each fund
in the Trust is sold only to Insurance Company Separate Accounts to serve as an
investment vehicle for variable annuity and variable life insurance contracts
and is offered through a form of prospectus containing the classes and funds
available to each contract. The Templeton Money Market Fund has a single class
of shares. The other nine funds ("Multiclass Funds") offer two classes of
shares, Class 1 and Class 2. All shares of the Multiclass Funds purchased before
May 1, 1997, when the Trust first issued class 2 shares, are considered Class 1
shares. Class 2 shares of the Multiclass Funds are subject to a Rule 12b-1 fees
of 0.25% (0.15% in the case of the Bond Fund) per year of Class 2's average
daily net assets. Rule 12b-1 fees will affect performance of Class 2 Shares.
Shares of the Templeton Money Market Fund and Class 1 Shares of the Multiclass
Funds are not subject to Rule 12b-1 fees. The Board of Trustees may establish
additional funds or classes in the future.
The capitalization of the Trust consists solely of an unlimited number of Shares
of beneficial interest with a par value of $0.01 each. When issued, Shares of
the Trust are fully paid, non-assessable by the Trust and freely transferable.
Unlike the stockholder of a corporation, Shareholders could under certain
circumstances be held personally liable for the obligations of the Trust. The
Declaration of Trust, however, disclaims liability of the Shareholders, Trustees
or officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust. The Declaration of Trust provides
for indemnification out of Trust property for all loss and expense of any
Shareholder held personally liable for the obligations of the Trust. The risk of
a Shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations and thus should be considered remote.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of a fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by federal securities law.
Each Share of each class of a fund will be given one vote, unless a different
allocation of voting rights is required under applicable law for a mutual fund
that is an investment medium for variable life insurance or annuity contracts.
The Separate Accounts, as Shareholders of the Trust, are entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Accounts will generally vote their shares in
accordance with instructions received from owners of the variable contracts. See
the Separate Account prospectus for more information regarding the pass-through
of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an Insurance Company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
For more information on the Trust, a Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030--toll free telephone (800) 774-5001 or (813) 823-8712.
Performance Information
From time to time, each class of a Fund advertises its performance. Performance
information for a class of the Fund will generally not be advertised unless
accompanied by comparable performance information for a Separate Account to
which a Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by a Fund.
Quotations of yield or total return for a class of a Fund will not take into
account charges and deductions against any Separate Account to which the Funds'
shares are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a Separate Account will take
such charges into account.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
Statements and Reports
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
Appendix Description of Bond Ratings*
Moody's Aaa - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest. AA - Bonds
rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong and, in the majority of instances, differ
from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment. A-2: Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Templeton Variable Products Series Fund
Prospectus--May 1, 1998
CLASS 2 SHARES
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Templeton Asset Allocation Fund
Templeton Bond Fund
Templeton Developing Markets Fund
Templeton International Fund
Templeton Stock Fund
Templeton Variable Products Series Fund (the "Trust"), is an open-end,
management investment company, consisting of ten separate investment portfolios
or funds (each a "Fund"), each of which has different investment objectives.
This prospectus contains information that a prospective investor should know
before investing.
Shares of each Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Contracts involve certain fees and expenses not described in this Prospectus and
also may involve certain restrictions or limitations on the allocation of
purchase payments or Contract values to different investment vehicles. In
particular, certain series or classes of the Trust may not be available in
connection with a particular Contract or in a particular state. See the
applicable Contract prospectus for information regarding fees and expenses of
the Contract and any applicable restrictions or limitations.
Each Fund, except the Money Market Fund, has two classes of shares: Class 1 and
Class 2. This prospectus offers only Class 2 shares of these multiclass Funds
and is for use with Contacts that make Class 2 shares of these Funds available.
For more information about the Trust's classes, see "Other
Information--Capitalization and Voting Rights," below.
A statement of additional information ("SAI") dated May 1, 1998, has been filed
with the Securities and Exchange Commission and is incorporated in its entirety
by reference in and made a part of this prospectus. The SAI is available without
charge upon request to the Trust's underwriter, Franklin Templeton Distributors
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 or by calling
1-800-774-5001 or 1-813-823-8712.
Shares of each Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Shares of each Fund involve investment risks, including the
possible loss of principal.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
OR INSURANCE COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS OFFERING THE VARIABLE INSURANCE CONTRACT. BOTH PROSPECTUSES SHOULD BE
READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.
TABLE OF CONTENTS PAGE
FRANKLIN GROWTH INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
FRANKLIN SMALL CAP INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
MUTUAL DISCOVERY INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
MUTUAL SHARES INVESTMENTS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON ASSET ALLOCATION FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON BOND FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON DEVELOPING MARKETS FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON INTERNATIONAL FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
TEMPLETON STOCK FUND
Expense Summary
Financial Highlights
Investment Objectives & Policies
Risk Considerations
Portfolio Management
COMMON SECURITIES AND INVESTMENT TECHNIQUES
COMMON RISK FACTORS
PURCHASE OF SHARES
NET ASSET VALUE
REDEMPTION OF SHARES
EXCHANGES
MANAGEMENT OF THE TRUST
DISTRIBUTION PLAN
DIVIDENDS AND DISTRIBUTIONS
FEDERAL INCOME TAX STATUS
OTHER INFORMATION
FRANKLIN GROWTH INVESTMENTS FUND
EXPENSE SUMMARY
Franklin Growth Investments Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Franklin Growth Investments Fund
The primary investment objective of the Franklin Growth Investments Fund is
capital appreciation. Current income is only a secondary consideration in
selecting portfolio securities.
Under normal market conditions, the Fund will invest primarily (at least 65% of
assets) in equity securities, including common and preferred stocks, or
securities convertible into common stocks, which are believed to offer favorable
possibilities for capital appreciation, but some of which may yield little or no
current income. The Fund's assets may be invested in shares of common or capital
stock traded on any national securities exchange or over-the- counter, in
convertible securities or, may keep a significant portion of its assets in cash
from time to time.
The Investment Manager will generally make long-term investments in equity
securities which have been selected based upon fundamental and quantitative
analysis. Following these policies, the Fund will typically invest predominantly
in equity securities issued by large-cap or mid-cap U.S. companies, which have
market capitalizations of $1 billion or more. It may also invest in smaller
capitalization companies, which may be subject to different and greater risks,
but there is no present intention of investing more than 20% of the Fund's
assets in such securities. As an operating policy, the Fund currently intends to
invest no more than 15% of its assets in foreign securities, including
Depositary Receipts, which involve special risks including currency fluctuations
and political uncertainty.
Consistent with its investment objective, the Fund expects to have a portion of
its assets invested in securities of companies involved in computing
technologies or computing technology-related companies. The technology sector as
a whole has historically been volatile and issues from this sector tend to be
subject to abrupt or erratic price movements. The Portfolio seeks to reduce such
risks through extensive research, and emphasis on more globally-competitive
companies.
OTHER INVESTMENTS. The Fund currently intends to invest no more than 5% of its
assets in debt obligations, including convertible debt obligations, rated Ba or
lower by Moody's or BB or lower by S&P, or unrated securities determined by the
Manager to be of comparable quality. SEE "COMMON RISK FACTORS," "COMMON
SECURITIES AND INVESTMENT TECHNIQUES" AND THE APPENDIX. The Fund may invest in
convertible preferred stocks, which are equity securities, generally carry a
higher degree of market risk than debt obligations, and often may be regarded as
speculative in nature. SEE "COMMON SECURITIES AND INVESTMENT TECHNIQUES" Under
the policies discussed in "Common Securities and Investment Techniques" and in
the SAI, the Fund may also borrow to one-third of the value of its total assets
(thought it does not currently expect any borrowing to exceed 5%); write covered
call options; purchase put options on securities; loan its portfolio securities;
enter into repurchase transactions; invest in restricted or illiquid securities;
and engage in other activities specifically identified for this Fund.
RISK CONSIDERATIONS
Franklin Growth Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it may invest a portion of its assets in small cap companies and foreign
securities. Stocks, and other equity securities representing an ownership
interest in a corporation, have historically outperformed other asset classes
over the long term, but tend to fluctuate more dramatically over the shorter
term.
Securities of smaller or unseasoned companies have historically presented
greater risks of price swings than securities of larger, more established
companies. Foreign securities, especially in developing markets, are subject to
special and additional risks related to currency fluctuations, market volatility
and economic, social and political uncertainty. For more details about these and
other risks, please see "Common Securities and Investment Techniques" and
"Common Risk Factors," below.
PORTFOLIO MANAGEMENT
Franklin Growth Investments Fund
Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. The Investment Manager also performs
similar services for other funds.
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.
Conrad B. Herrmann
Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann holds a Master of Business Administration degree from Harvard
University and a Bachelor of Arts degree from Brown University. Mr. Herrmann is
a Chartered Financial Analyst has been with the Franklin Templeton Group since
1989 and prior thereto was Vice President and General Manager of Aquila
Management. He will manage the Fund from inception.
Kevin Carrington
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carrington is a Charter Financial Analyst and holds a Bachelor of Science
degree in business administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992 and will manage the Fund
from inception.
Vivian J. Palmieri
Portfolio Manager
Franklin Advisers, Inc.
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams College.
He has been with the Franklin Templeton Group since 1965. Mr. Palmieri will
manage the Fund from inception.
For its services, the Investment Manager receives a fee equivalent on an annual
basis to 0.60% of the average daily net assets of the Fund, reduced to 0.50% of
such assets in excess of $200 million, to 0.40% of such assets in excess of $1.3
billion.
FRANKLIN SMALL CAP INVESTMENTS FUND
EXPENSE SUMMARY
Franklin Small Cap Investments Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Franklin Small Cap Investments Fund
The investment objective of the Franklin Small Cap Investments Fund is long-term
capital growth. The Fund seeks to accomplish its objective by investing
primarily in equity securities of small capitalization growth companies.
Investments in small capitalization companies may involve greater risks and
greater volatility than investments in larger and more established companies.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund will invest at
least 65% of its assets in equity securities of small capitalization growth
companies ("small cap companies"). A small cap company generally has a market
capitalization of less than $1 billion at the time of the Fund's investment and,
in the opinion of the Fund's Manager, is positioned for rapid growth in
revenues, earnings or assets. Market capitalization is defined as the total
market value of a company's outstanding common stock. The securities of small
cap companies are traded on U.S. or foreign stock exchanges and
over-the-counter. As an operating policy the Fund will not invest more than 10%
of its assets in securities issued by companies with less than three years of
continuous operation.
The Fund seeks to invest at least one-third of its assets in equity securities
of companies with market capitalizations of $550 million or less; there is no
assurance, however, that the Fund will always be able to find suitable companies
to include in this one-third portion. The Manager will monitor the availability
of securities suitable for investment by the Fund and recommend appropriate
action to the Board of Trustees of the Trust if it appears that this goal will
not be attainable under the Fund's current objective and other policies. Equity
securities of small cap companies may consist of common stock, preferred stock,
warrants for the purchase of common stock, and convertible securities. The Fund
currently does not intend to invest more than 10% of its assets in convertible
securities. See "Common Securities and Investment Techniques."
SELECTION OF PORTFOLIO INVESTMENTS. The Fund has been designed to provide
investors with potentially greater long-term rewards by investing in securities
of small cap companies which may offer the potential for significant capital
appreciation since they may be overlooked by investors or undervalued in
relation to their earnings power. Small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, and therefore may provide greater opportunities for long-term capital
growth as a result of relative inefficiencies in the marketplace. Such companies
may be undervalued because they are part of an industry that is out of favor
with investors, although the individual companies may have high rates of earning
growth and be financially sound. Selection of small cap company equity
securities for the Fund will be based on characteristics such as the financial
strength of the company, the expertise of management, the growth potential of
the company within its industry and the growth potential of the industry itself.
Small cap companies often pay no dividends and current income is not a factor in
the selection of stocks. The Manager uses a disciplined approach to stock
selection, blending fundamental and quantitative analysis.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its assets in foreign
securities, including those of developing market issuers and sponsored or
unsponsored Depositary Receipts. The Fund presently does not intend to invest
more than 5% of its assets in developing markets securities.
OTHER INVESTMENTS. Although the Fund's assets will be invested primarily in
equity securities of small cap companies, the Fund may invest up to 35% of its
assets in other instruments, which may cause its performance to vary from that
of the small capitalization equity markets. The Fund may invest in equity
securities of larger capitalization companies which the Fund's Manager believes
have strong growth potential, or in equity securities of relatively well-known,
larger companies in mature industries which the Manager believes have the
potential for capital appreciation.
The Fund may also invest in debt securities which the Manager believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income is incidental to the
Fund's objective of capital growth. The Fund may invest in debt securities rated
B or above by Moody's or S&P, or in unrated securities the Manager has
determined are of comparable quality. Currently, however, the Fund does not
intend to invest more than 5% of its assets in debt obligations (including
convertible debt securities) rated lower than BBB by S&P or Baa by Moody's or,
if unrated, determined by the Manager to be of comparable quality. SEE "COMMON
SECURITIES AND INVESTMENT TECHNIQUES," "COMMON RISK FACTORS," AND THE APPENDIX.
The Fund currently does not intend to invest more than 10% of its assets in real
estate investment trusts ("REITs") including small capitalization REITs.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Securities
and Investment Techniques," "Common Risk Factors," and the SAI, the Fund may
also write covered put and call options on securities or financial indices;
purchase put and call options on securities or financial indices; purchase and
sell futures contracts or related options with respect to securities, indices
and currencies; invest in restricted or illiquid securities; lend portfolio
securities; borrow up to one-third of the value of its total assets; enter into
repurchase or reverse repurchase agreements; and engage in other activities
specifically identified for this Fund.
RISK CONSIDERATIONS
Franklin Small Cap Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it invests primarily in small cap companies and foreign securities.
Stocks, and other equity securities representing an ownership interest in a
corporation, have historically outperformed other asset classes over the long
term, but tend to fluctuate more dramatically over the shorter term.
The Fund will primarily invest in relatively new or unseasoned companies which
are in their early stages of development, or small cap companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. Securities of smaller or unseasoned companies present
greater risks than securities of larger, more established companies. The
companies may have relatively small revenues, limited product lines, and may
have a small share of the market for their products or services. Small cap
companies may lack depth of management, they may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms, or they may be developing
or marketing new products or services for which markets are not yet established
and may never become established. Due to these and other factors, small cap
companies may suffer significant losses as well as realize substantial growth,
and investments in such companies tend to be more volatile and are therefore
speculative. Besides exhibiting greater volatility, small cap company stocks
may, to a degree, fluctuate independently of larger company stocks. SEE "COMMON
RISK FACTORS." THE PORTFOLIO MAY NOT BE APPROPRIATE FOR SHORT-TERM INVESTORS,
AND AN INVESTMENT IN THE PORTFOLIO SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. INVESTMENTS IN
FOREIGN SECURITIES, PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "COMMON RISK FACTORS" BELOW AND IN THE SAI.
PORTFOLIO MANAGEMENT
Franklin Small Cap Investments Fund
Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. The Investment Manager also performs
similar services for other funds.
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.
Edward B. Jamieson
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Jamieson holds a Bachelor of Arts degree from Bucknell University and a
Master's degree in accounting and finance from the University of Chicago
Graduate School of Business. He has been with the Franklin Templeton Group since
1987. He is a member of several securities industry-related committees and
associations. He has managed the Small Cap Fund from inception.
Michael McCarthy
Portfolio Manager
Franklin Advisers, Inc.
Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with the Franklin Templeton Group since
1992. He has managed the Small Cap Fund from inception.
The Fund is obligated to pay the Investment Manager a monthly fee computed at
the annual rate of 0.75% of the Fund's average daily net assets up to and
including $200 million, plus 0.65% of the value of average daily net assets up
to and including $1.3 billion, plus 0.55% of the value of average daily net
assets over $1.3 billion.
MUTUAL DISCOVERY INVESTMENTS FUND
EXPENSE SUMMARY
Mutual Shares Investments Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Mutual Discovery Investments Fund
The investment objective of the Mutual Discovery Investments Fund is capital
appreciation.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or money market
instruments. The Fund may invest in securities from any size issuer, and may
invest a substantial portion of its assets in securities of small capitalization
issuers, which have market capitalizations of less than $1 billion. Securities
of foreign or small cap issuers may be subject to different and greater risks,
as discussed below. The Fund may invest in securities that are traded on U.S. or
foreign exchanges, NASDAQ national market or in the over-the-counter market. It
may invest in any industry sector, although it will not concentrate in any one
industry. From time to time, the Fund may hold significant cash positions until
suitable investment opportunities are available, consistent with its policy on
temporary investments.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation loan participations and trade claims, of debtor companies involved in
reorganization or financial restructuring, some of which may have very long
maturities. Some of the Indebtedness is illiquid.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of its Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Investment Manager may itself seek to influence or control
management or may cause the Fund to invest in other entities that purchase
securities for the purpose of influencing or controlling management, such as
investing in a potential takeover or leveraged buyout or investing in other
entities engaged in such practices.
FOREIGN INVESTMENTS. The Fund may purchase securities in any foreign country,
developed or undeveloped, and currently expects to invest up to 50% or more of
its total assets in foreign securities, including sponsored or unsponsored
Depositary Receipts. The Fund presently does not intend to invest more than 5%
of its assets in securities of developing markets including Eastern European
countries and Russia. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals.
CURRENCY TECHNIQUES. The Fund generally expects to hedge against currency risks
to the extent that hedging is available. Currency hedging techniques may include
investments in foreign currency futures contracts, options on foreign currencies
or currency futures, forward foreign currency exchange contracts ("forward
contracts") and currency swaps, all of which involve specialized risks. See
"COMMON RISK FACTORS."
CREDIT QUALITY. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations
OTHER INVESTMENT POLICIES. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Common Securities and Investment Techniques,"
"Common Risk Factors," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase securities and debt
obligations on a "when-issued" or "delayed delivery" basis; invest in
collateralized mortgage obligations; borrow up to one-third of the value of its
total assets; invest in restricted or illiquid securities; purchase and sell
exchange-listed and over- the-counter put and call options on securities, equity
and fixed-income indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and engage in other activities
specifically identified for this Fund.
RISK CONSIDERATIONS
Mutual Discovery Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it may invest in foreign securities, small cap companies and lower-rated
debt obligations. Stocks, and other equity securities representing an ownership
interest in a corporation, have historically outperformed other asset classes
over the long term, but tend to fluctuate more dramatically over the shorter
term.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. Investments in
foreign developing markets involve heightened risks relating to the smaller size
and lesser liquidity of those markets. Investors should consider carefully the
substantial risks involved in investing in foreign securities, risks that are
heightened in developing markets. See "Common Risk Factors" below and in the
SAI.
Securities of smaller companies, particularly if they are unseasoned, present
greater risks than securities of larger, more established companies. The smaller
companies in which the Fund invests are often not well known, may often trade at
a discount and may not be followed by institutions. The companies may have
relatively small revenues, limited product lines, and a small share of the
market for their products or services. Small cap companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small cap companies may suffer significant losses as
well as realize substantial growth, and investments in such companies tend to be
more volatile and are therefore speculative. Besides exhibiting greater
volatility, small cap company stocks may fluctuate independently of larger
company stocks. See also "Common Risk Factors."
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. Because of the Fund's policy of investing in lower
rated, higher risk debt obligations, an investment in the Fund is accompanied by
a higher degree of risk than is present with an investment in higher rated,
lower yielding obligations. Accordingly, investors considering the Fund should
evaluate their overall investment goals and tolerance for risk. See "Common Risk
Factors" and Appendix.
PORTFOLIO MANAGEMENT
Mutual Discovery Investments Fund
Franklin Mutual Advisers, Inc., 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078 is the Investment Manager. The Investment Manager manages the
Fund's assets and makes its investment decisions. The following persons are
primarily responsible for the day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996 and will
manage the Fund from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the Fund
from inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Fund from inception.
MANAGEMENT FEES
For its services, the Investment Manager receives a fee equivalent on an annual
basis to 0.80% of the average daily net assets of the Fund.
MUTUAL SHARES INVESTMENTS FUND
EXPENSE SUMMARY
Mutual Shares Investments Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
INVESTMENT OBJECTIVE AND POLICIES
Mutual Shares Investments Fund
The principal investment objective of the Mutual Shares Investments Fund is
capital appreciation, with income as a secondary objective.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests
primarily in domestic equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer, including
smaller capitalization companies, which may be subject to different and greater
risks. See "Common Risk Factors." It will tend to invest, however, in securities
of issuers with market capitalizations in excess of $500 million. It may invest
in securities that are traded on U.S. or foreign exchanges, NASDAQ national
market or in the over-the-counter market. It may invest in any industry sector,
although it will not concentrate in any one industry. From time to time, the
Fund may hold significant cash positions, consistent with its policy on
temporary investments, until suitable investment opportunities are available.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Indebtedness"), including without
limitation, loan participations and trade claims, of debtor companies involved
in reorganization or financial restructuring, some of which may have very long
maturities. Some of the Indebtedness is illiquid.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of the Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Investment Manager may itself seek to influence or control
management or may cause the Fund to invest in other entities that purchase
securities for the purpose of influencing or controlling management, such as
investing in a potential takeover or leveraged buyout or investing in other
entities engaged in such practices.
CREDIT QUALITY. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
FOREIGN INVESTMENTS. Although the Fund reserves the right to purchase securities
in any foreign country, developed or undeveloped, the Fund's current investment
strategy is to invest primarily in domestic securities, with no more than
10%-15% of its total assets in foreign securities, including sponsored or
unsponsored Depositary Receipts. The Fund presently does not intend to invest
more than 5% of its assets in securities of developing markets including Eastern
European countries and Russia. Foreign investments may include both voting and
non-voting securities, sovereign debt and participation in foreign government
deals. The Fund's investments in foreign securities involve risks related to
currency fluctuations and political uncertainty. See "Common Risk Factors" below
and the SAI.
CURRENCY TECHNIQUES. The Fund generally expects to hedge against currency risks
to the extent that hedging is available. Currency hedging techniques may include
investments in foreign currency futures contracts, options on foreign currencies
or currency futures, forward foreign currency exchange contracts ("forward
contracts") and currency swaps, all of which involve specialized risks. See
"Common Risk Factors."
OTHER INVESTMENT POLICIES. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Common Securities and Investment Techniques,"
"Common Risk Factors," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase securities and debt
obligations on a "when-issued" or "delayed delivery" basis; invest in
collateralized mortgage obligations; borrow up to one-third of the value of its
total assets; invest in restricted or illiquid securities; purchase and sell
exchange-listed and over-the-counter put and call options on securities, equity
and fixed-income indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and engage in other activities
specifically identified for this Fund.
RISK CONSIDERATIONS
Mutual Shares Investments Fund
The Fund carries the risks common to all stock investments, plus special risks
because it may invest in lower-rated debt obligations and foreign securities.
Stocks, and other equity securities representing an ownership interest in a
corporation, have historically outperformed other asset classes over the long
term, but tend to fluctuate more dramatically over the shorter term.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. Because of the Fund's policy of investing in lower
rated, higher risk debt obligations, an investment in the Fund is accompanied by
a higher degree of risk than is present with an investment in higher rated,
lower yielding obligations. Accordingly, investors considering the Fund should
evaluate their overall investment goals and tolerance for risk. See "Common Risk
Factors" and Appendix.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. Investments in
foreign developing markets involve heightened risks relating to the smaller size
and lesser liquidity of those markets. Investors should consider carefully the
substantial risks involved in investing in foreign securities, risks that are
heightened in developing markets. See "Common Risk Factors" below and in the
SAI.
PORTFOLIO MANAGEMENT
Mutual Shares Investments Fund
Franklin Mutual Advisers, Inc., 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078 is the Investment Manager. The Investment Manager manages the
Fund's assets and makes its investment decisions. The following persons are
primarily responsible for the day-to-day management of the Fund's portfolio.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and will manage the Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996 and will
manage the Fund from inception.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and will manage the Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
Mr. Garea has also been a Manager (Director) of MB Metroplis L.L.C. since 1994.
He joined the Franklin Templeton Group in November 1996 and will manage the Fund
from inception.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and will manage the
Fund from inception.
MANAGEMENT FEES. For its services, the Investment Manager receives a fee
equivalent on an annual basis to 0.60% of the average daily net assets of the
Fund.
TEMPLETON ASSET ALLOCATION FUND
EXPENSE SUMMARY
Templeton Asset Allocation Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 2 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Asset Allocation Fund - Class 2
For a Class 2 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Asset Allocation Fund -
Class 2. The information has been audited by McGladrey & Pullen, LLP, the
Trust's independent auditors. Their audit report for each of the last five
fiscal years, appears in the financial statements in the Trust's Annual Report
for the fiscal year ended December 31, 1997. The Trust's annual report also
includes more information about the Fund's performance. For a free copy, please
call 1-800-774-5001. [to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Asset Allocation Fund
The Templeton Asset Allocation Fund seeks a high level of total return through a
flexible policy of investing in the following market segments: stocks of
companies in any nation, debt securities of companies and governments of any
nation, and money market instruments. The mix of investments among these three
market segments will be adjusted in an attempt to capitalize on total return
potential produced by changing economic conditions throughout the world. The
Fund's Investment Manager may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
the management of the Fund's portfolio. There can be no assurance that the Fund
will achieve its investment objective.
There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments. Except as noted
below and under "Investment Restrictions" in the SAI, the Fund's Investment
Manager has complete flexibility in determining the amount and nature of stock,
debt securities or money market instruments in which the Fund may invest.
The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. It has the flexibility to invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount. The Fund may invest in medium
and lower quality debt securities that are rated between BBB and as low as D by
S & P, and between Baa and as low as C by Moody's or, if unrated, are of
equivalent investment quality as determined by the Investment Manager. As an
operating policy, which may be changed without shareholder approval, the Fund
will not invest more than 15% of its total assets in debt securities rated lower
than BBB by S & P or Baa by Moody's or, if unrated, are of equivalent
investment quality as determined by the Investment Manager. The Fund may, from
time to time, purchase defaulted debt securities if, in the opinion of the
Investment Manager, the issuer may resume interest payments in the near future
or other advantageous developments appear likely in the future. Consistent with
this limit the Fund will not invest more than 10% of its total assets in
defaulted debt securities, which may be illiquid. Bonds rated BB or lower,
commonly referred to as "junk bonds," are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and may be in default. See "Risk Considerations" for
this Fund, and "Common Risk Factors," below.
The Fund may invest in collateralized mortgage obligations and restricted
securities, lend its portfolio securities, and borrow up to 30% of the value of
its total assets for investment purposes. The Fund may purchase and sell
financial futures contracts, stock index futures contracts, and foreign currency
futures contracts for hedging purposes only and not for speculation. It may
engage in such transactions only if the total contract value of the futures
contracts does not exceed 20% of the Fund's total assets. The Fund may also
invest in forward foreign currency exchange contracts and options on foreign
currencies. These and other types of investments and investment techniques are
described in greater detail under "Common Securities and Investment Techniques"
in this Prospectus and in the SAI.
RISK CONSIDERATIONS
Templeton Asset Allocation Fund
The Fund carries the risks common to all stock and bond investments, plus
special risks due to its substantial investments in foreign securities. Stocks,
and other equity securities representing an ownership interest in a corporation,
have historically outperformed other asset classes over the long term, but tend
to fluctuate more dramatically over the shorter term. Bonds, and other debt
obligations, are affected by changes in interest rates and the creditworthiness
of their issuers.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets involve heightened risks related to
the smaller size and lesser liquidity of these markets. INVESTORS SHOULD
CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE
"COMMON RISK FACTORS."
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's (commonly referred to as "junk bonds");
however, the values of lower rated securities generally fluctuate more than
those of higher rated securities and involve greater risk of loss of income and
principal. SEE "COMMON RISK FACTORS," and the Appendix.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. The table
below shows the percentage of the Asset Allocation and Bond Funds' assets
invested in debt securities rated in each of the specific rating categories
shown and those that are not rated by the rating agency but deemed by the
Investment Managers to be of comparable credit quality. The information was
prepared based on a 12 month dollar weighted average of the portfolio
compositions in the fiscal year ended December 31, 1997. The Appendix to the SAI
includes a description of each rating category. [Asset Composition Table to be
supplied in B amendment]
PORTFOLIO MANAGEMENT
Templeton Asset Allocation Fund
The Investment Manager for the Templeton Asset Allocation Fund is Templeton
Investment Counsel, Inc.,("TICI") 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091. TICI manages the Fund's assets and makes its investment
decisions.
The lead portfolio manager of the fixed income portion of the Asset Allocation
Fund since 1993 is Thomas Latta, Vice President of Templeton Global Bond
Managers ("TGBM"), a division of TICI. Mr. Latta joined the Templeton
organization in 1991. He is the senior portfolio manager for developed markets
fixed income and has research responsibilities for the core European markets.
Mr. Latta is also responsible for internal fixed income systems development. Mr.
Latta began working in the securities industry in 1981. His experience includes
seven years with Merrill Lynch where he was part of an investment team to the
Saudi Arabian Monetary Authority in Riyadh, Saudi Arabia. While at Merrill
Lynch, Mr. Latta also acted as an advisor to investment managers concerning the
modeling and application of interest rate strategies in fixed income portfolios.
Neil Devlin exercises secondary portfolio management responsibilities with
respect to the fixed income portion of the Fund. Mr. Devlin, Executive Vice
President of TGBM, joined the Templeton organization in 1987. Prior to that
time, he was a portfolio manager and bond analyst with Constitutional Capital
Management of Boston, where he managed a portion of the Bank of New England's
pension money, a number of trust and corporate pension accounts, and began and
managed a mortgage-backed securities fund for the Bank. Before that, Mr. Devlin
was a bond trader and research analyst for the Bank of New England.
The lead portfolio manager for the equity portion of the Fund since 1995 is Gary
Clemons, Vice President of TICI. He is a research analyst with responsibility
for the financial services and telecommunications industry, as well as country
coverage of Argentina and Sweden. Prior to joining the Templeton organization in
1993, Mr. Clemons worked as a research analyst for Structured Asset Management
in New York, a subsidiary of Templeton International, where his duties included
management of a small capitalization fund. He holds an M.B.A. with an emphasis
on finance/investment banking from the University of Wisconsin and a B.S. from
the University of Nevada-Reno. Peter Nori and William T. Howard, Jr. exercise
secondary portfolio management responsibilities for the equity portion of the
Fund. Mr. Nori, Vice President of the Investment Manager, is a research analyst
whose current responsibilities include covering data processing/software,
textile and apparel stocks. Mr. Nori completed Franklin's management training
program before moving into portfolio research in 1990 as an equity analyst and
co-portfolio manager of the Franklin Convertible Securities Fund. He holds a
B.S. degree in Finance and an M.B.A. with an emphasis in finance from the
University of San Francisco. Mr. Howard holds a BA in international studies from
Rhodes College and an MBA in finance from Emory University. He is a Chartered
Financial Analyst and a member of the Financial Analyst Society. Before joining
the Templeton Organization in 1993, Mr. Howard was a portfolio manager and
analyst with the Tennessee Consolidated Retirement System in Nashville,
Tennessee, where he was responsible for research and management of the
international equity portfolio, and specialized in the Japanese equity market.
As a portfolio manager and research analyst with Templeton, Mr. Howard's
research responsibilities include the transportation, shipping, machinery and
engineering industries worldwide. He is also responsible for country coverage of
both Japan and New Zealand.
Management Fees
Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Asset Allocation Fund will pay its Investment Manager a monthly fee equal on an
annual basis to 0.65% of the Fund's average daily net assets up to $200 million,
0.585% of such net assets up to $1.3 billion, and 0.52% of such net assets over
$1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid ( )% and ()% of its
average daily net assets in management fees and total operating expenses
(including management fees), respectively.
TEMPLETON BOND FUND
EXPENSE SUMMARY
Templeton Bond Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 2 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.15%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Bond Fund - Class 2
For a Class 2 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Bond Fund - Class 2.
The information has been audited by McGladrey & Pullen, LLP, the Trust's
independent auditors. Their audit report for each of the last five fiscal years,
appears in the financial statements in the Trust's Annual Report for the fiscal
year ended December 31, 1997. The Trust's annual report also includes more
information about the Fund's performance. For a free copy, please call
1-800-774-5001. [to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Bond Fund
The Templeton Bond Fund's investment objective is high current income.
Consistent with this objective, the Fund may also consider the potential for
capital appreciation due to changes in interest rates, currency exchange rates
and credit quality when purchasing securities.
The Fund seeks to achieve its objective through a flexible policy of investing
primarily in debt securities of companies, governments and government agencies
of various nations throughout the world, and in debt securities which are
convertible into common stock of such companies. In pursuit of its investment
objective, the Fund will invest at least 65% of its assets in bonds and
debentures of such issuers. The Fund may invest in debt securities rated in any
category by Standard & Poor's Corporation ("S&P") or Moody's Investors Service,
Inc. ("Moody's") and securities which are unrated by any rating agency. See
"Common Risk Factors" and the Appendix in the Statement of Additional
Information for a description of the S&P and Moody's ratings. The Fund and its
investment manager, Templeton Global Bond Managers ("TGBM" or the "Investment
Manager"), a division of Templeton Investment Counsel, Inc. ("TICI"), may, from
time to time, use various methods of selecting securities for the Fund's
portfolio, and may also employ and rely on independent or affiliated sources of
information and ideas in connection with management of the Fund's portfolio.
There can be no assurance that the Fund will achieve its investment objective.
The average maturity of debt securities in the Fund's portfolio will fluctuate
depending upon TGBM's judgment as to future interest rate changes. Debt
securities in which the Fund may also invest include various corporate debt
obligations, structured investments, commercial paper, certificates of deposit,
bankers' acceptances, and repurchase agreements with respect to these
securities.
The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D by S&P, and between Baa and as low as C by Moody's
or, if unrated, are of equivalent investment quality as determined by the
Investment Manager. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future or other advantageous developments appear
likely in the future. The Fund will not invest more than 10% of its total assets
in defaulted debt securities, which may be illiquid. Bonds rated BB or lower,
commonly referred to as "junk bonds," are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and may be in default. See "Risk Considerations" for
this Fund, and "Common Risk Factors," below.
The Fund's portfolio turnover rate may generally exceed 100% per year, and was (
) % in 1997. The Fund's higher turnover rates are generally due to bond
maturities, and the rebalancing of the portfolio to keep interest rate risk and
country allocations at desired levels. Higher portfolio turnover rates generally
increase transaction costs, which are Fund expenses. See "Common Securities and
Investment Techniques," below.
The Fund may also buy and sell financial futures contracts, bond index futures
contracts, and foreign currency futures contracts. The Fund may purchase and
sell any of these futures contracts for hedging purposes only and not for
speculation. It may engage in such transactions only if the total contract value
of the futures contracts does not exceed 20% of the Fund's total assets. In
addition, the Fund may invest in forward foreign currency exchange contracts,
options on foreign currencies, depositary receipts, "when-issued" securities and
collateralized mortgage obligations, lend its portfolio securities, and borrow
up to 30% of the value of its total assets for investment purposes. These
investment techniques are discussed under "Common Securities and Investment
Techniques."
Certain types of investments and investment techniques are described in greater
detail under "Common Securities and Investment Techniques" in this Prospectus
and in the SAI.
RISK CONSIDERATIONS
Templeton Bond Fund
The Fund carries the risks common to all bond investments, plus special risks
because it invests primarily in foreign debt obligations, and may invest in
lower-rated debt obligations. Bonds, and other debt obligations, are affected by
changes in interest rates and the creditworthiness of their issuers. Foreign
securities, particularly in developing markets, are subject to special and
additional risks related to currency fluctuations, market volatility and
economic, social and political uncertainty. The Fund's investments in high
yield, lower-rated ("junk") bonds generally have greater price swings and credit
risk than higher-rated bonds. For more details about these and other risks,
please see "Common Securities and Investment Techniques" and "Common Risk
Factors," below.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. The table
below shows the percentage of the Asset Allocation and Bond Funds' assets
invested in debt securities rated in each of the specific rating categories
shown and those that are not rated by the rating agency but deemed by the
Investment Managers to be of comparable credit quality. The information was
prepared based on a 12 month dollar weighted average of the portfolio
compositions in the fiscal year ended December 31, 1997. The Appendix to the SAI
includes a description of each rating category. [Asset Composition Table to be
supplied in B amendment]
PORTFOLIO MANAGEMENT
Templeton Bond Fund
The Investment Manager for the Templeton Bond Fund is Templeton Investment
Counsel, Inc. ("TICI") 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091. TICI manages the Fund's assets and makes its investment decisions.
The lead portfolio manager of the Templeton Bond Fund since 1993 is Thomas
Latta, Vice President of TGBM. Mr. Latta joined the Templeton organization in
1991. He is the senior portfolio manager for developed markets fixed income and
has research responsibilities for the core European markets. Mr. Latta is also
responsible for internal fixed income systems development. Mr. Latta began
working in the securities industry in 1981. His experience includes seven years
with Merrill Lynch where he was part of an investment team to the Saudi Arabian
Monetary Authority in Riyadh, Saudi Arabia. While at Merrill Lynch, Mr. Latta
also acted as an advisor to investment managers concerning the modeling and
application of interest rate strategies in fixed income portfolios. Mr. Latta
attended the University of Missouri and New York University. Neil Devlin
exercises secondary portfolio management responsibilities with respect to the
Fund. Mr. Devlin, Executive Vice President of the Investment Manager, joined the
Templeton organization in 1987 and has managed the Fund since May 1996. Prior to
that time, he was a portfolio manager and bond analyst with Constitutional
Capital Management of Boston, where he managed a portion of the Bank of New
England's pension money, a number of trust and corporate pension accounts, and
began and managed a mortgage-backed securities fund for the Bank. Before that,
Mr. Devlin was a bond trader and research analyst for the Bank of New England.
Mr. Devlin holds a BA from Brandeis University. Ms. New an analyst with the
Investment Manager, joined the Templeton organization in 1993 and has managed
the Fund since May 1996. Prior to that time, she was an auditor with the
accounting firm of Deloitte and Touche.
Management Fees
For the fiscal year ended December 31, 1997, the Templeton Bond Fund paid ( )%
and ()% of its average daily net assets in management fees and total operating
expenses (including management fees), respectively.
TEMPLETON DEVELOPING MARKETS FUND
EXPENSE SUMMARY
Templeton Developing Markets Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 2 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Developing Markets Fund - Class 2
For a Class 2 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Developing Markets Fund
- - Class 2. The information has been audited by McGladrey & Pullen, LLP, the
Trust's independent auditors. Their audit report for each of the last five
fiscal years, appears in the financial statements in the Trust's Annual Report
for the fiscal year ended December 31, 1997. The Trust's annual report also
includes more information about the Fund's performance. For a free copy, please
call 1-800-774-5001. [to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Developing Markets Fund
The investment objective of the Templeton Developing Markets Fund is long-term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in equity securities of issuers in countries having developing
markets. It is currently expected that under normal conditions at least 65% of
the Fund's total assets will be invested in developing market equity securities.
The Fund and its investment manager, Templeton Asset Management Ltd. (the
"Investment Manager"), may, from time to time, use various methods of selecting
securities for the Fund's portfolio, and may also employ and rely on independent
or affiliated sources of information and ideas in connection with management of
the Fund's portfolio. There can be no assurance that the Fund will achieve its
investment objective.
The Fund considers countries having developing markets to be all countries that
are generally considered to be developing or emerging countries by the
International Bank for Reconstruction and Development (more commonly referred to
as the World Bank) or the International Finance Corporation, as well as
countries that are classified by the United Nations or otherwise regarded by
their authorities as developing. Currently, the countries not included in this
category include Ireland, Spain, New Zealand, Australia, the United Kingdom,
Italy, the Netherlands, Belgium, Austria, France, Canada, Germany, Denmark, the
United States, Sweden, Finland, Norway, Japan, Iceland, Luxembourg and
Switzerland. In addition, as used in this Prospectus, developing market equity
securities means (i) equity securities of companies the principal securities
trading market for which is a developing market country, as defined above, (ii)
equity securities, traded in any market, of companies that derive 50% or more of
their total revenue from either goods or services produced in such developing
market countries or sales made in such developing market countries or (iii)
equity securities of companies organized under the laws of, and with a principal
office in, a developing market country. "Equity securities," as used in this
Prospectus, refers to common stock, preferred stock, warrants or rights to
subscribe to or purchase such securities and sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts").
Determinations as to eligibility will be made by the Investment Manager based on
publicly available information and inquiries made to the companies. (See "Common
Risk Factors" for a discussion of the nature of information publicly available
for non-U.S. companies.) The Fund will at all times, except during defensive
periods, maintain investments in at least three countries having developing
markets.
The Fund seeks to benefit from economic and other developments in developing
markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having developing markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
countries, particularly the emerging market countries which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature developing markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.
For capital appreciation, the Fund may invest up to 35% of its total assets in
debt securities (defined as bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits, bankers' acceptances and structured
investments). Certain debt securities can provide the potential for capital
appreciation based on various factors such as changes in interest rates,
economic and market conditions, improvement in an issuer's ability to repay
principal and pay interest, and ratings upgrades. Additionally, convertible
bonds offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bond to benefit from increases in the
market price of the securities into which they are convertible. The Fund may
invest in debt securities which are rated at least C by Moody's Investors
Service, Inc. ("Moody's") or C by Standard & Poor's Corporation ("S&P") or
unrated debt securities deemed to be of comparable quality by the Investment
Manager. As an operating policy, which may be changed without shareholder
approval, the Fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S & P or Baa by Moody's or, if unrated, are
of equivalent investment quality as determined by the Investment Manager. As a
fundamental policy (which may not be changed without shareholder approval) the
Fund will not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid. Bonds rated BB or lower, commonly referred to
as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. See "Common Risk Factors," and the Appendix,
below.
When the Investment Manager believes that market conditions warrant, the Fund
may adopt a temporary defensive position and may invest without limit in money
market securities denominated in U.S. dollars or in the currency of any foreign
country. See "Common Securities and Investment Techniques."
The Portfolio may invest up to 10% of its assets in securities of closed end
investment companies to facilitate foreign investment. The Fund may also lend
its portfolio securities; borrow up to one-third of the value of its total
assets for investment purposes (i.e., "leverage" its portfolio); purchase
convertible securities and warrants; invest in restricted or illiquid
securities; enter into transactions in options on securities, securities indices
and foreign currencies; enter into forward foreign currency contracts, and
futures contracts and related options. When deemed appropriate by the Investment
Manager, the Fund may invest cash balances in repurchase agreements and other
money market investments to maintain liquidity in an amount to meet expenses or
for day-to-day operating purposes. These investment techniques are described
below and under the heading "Investment Objective and Policies" in the SAI.
The Fund does not emphasize short-term trading profits and usually expects to
have an annual portfolio turnover rate not exceeding 50%.
RISK CONSIDERATIONS
Templeton Developing Markets Fund
The Fund carries the risks common to all stock investments, plus special risks
because it invests primarily in foreign developing markets securities. Stocks,
and other equity securities representing an ownership interest in a corporation,
have historically outperformed other asset classes over the long term, but tend
to fluctuate more dramatically over the shorter term.
Foreign securities are subject to special and additional risks related to
currency fluctuations, market volatility and economic, social and political
uncertainty. Foreign developing markets investments involve increased risks due
to the smaller size and lesser liquidity of those markets. AN INVESTMENT IN THE
FUND MAY BE CONSIDERED SPECULATIVE AND MAY NOT BE APPROPRIATE FOR SHORT-TERM
INVESTORS. INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL AND HEIGHTENED
RISKS INVOLVED IN INVESTING IN FOREIGN DEVELOPING MARKETS SECURITIES. For more
details about these and other risks, please see "Common Securities and
Investment Techniques" and "Common Risk Factors," below.
PORTFOLIO MANAGEMENT
Templeton Developing Markets Fund
The Investment Manager for the Developing Markets Fund is Templeton Asset
Management Ltd. ("Templeton Singapore"), 7 Temasek Boulevard, # 38-03, Suntec
Tower One, Singapore, 038987.
The following persons are primarily responsible for the day-to-day management of
the Developing Markets Fund's portfolio.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.
Dr. Mobius holds a Doctor of Philosophy degree in economics and political
science from the Massachusetts Institute of Technology. He earned his Bachelor's
and Master's degrees from Boston University. He is a member of several
industry-related associations. Dr. Mobius joined the Franklin Templeton Group in
1987 and has managed the Developing Markets Fund from inception.
H. Allan Lam
Portfolio Manager and Analyst
Templeton Asset Management Ltd.
Mr. Lam holds a Bachelor of Arts degree in accounting from Rutgers University.
He has had extensive auditing experience with Deloitte Touche & Tohmatsu and
KPMG Peat Marwick. He joined the Franklin Templeton Group in 1987 and has
managed the Developing Markets Fund from inception.
Tom Wu
Director, Portfolio Manager, and Analyst
Templeton Asset Management Ltd.
Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in economics from the
University of Hong Kong. Prior to joining the Franklin Templeton Group, in 1987,
he was a stockbroker at Vickers da Costa Hong Kong Ltd. He has managed the
Developing Markets Fund from inception.
Dennis Lim
Vice President, Portfolio Manager
Templeton Asset Management Ltd.
Mr. Lim holds a Master of Science degree in Management (Finance Analysis), from
the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter of
Wisconsin). He earned a Bachelor of Science degree in building engineering from
the National University of Singapore. Prior to joining the Franklin Templeton
Group, in 1990, he worked for the Government of Singapore's Ministry of National
Development. He has managed the Fund since February 1996.
Eddie Chow
Investment Analyst
Templeton Asset Management Ltd.
Mr. Chow holds a Master of Business Administration degree from the University of
Wisconsin-Milwaukee. Prior to joining the Franklin Templeton Group, in 1994, he
worked for many years in the finance and banking industry. He has managed the
Fund since February 1996.
Tek-Khoan Ong
Portfolio Manager
Templeton Asset Management Ltd.
Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, graduating with honors and on the director's list. He earned a Bachelor
of Science degree in computing science and a Bachelor of Science degree, with
honors, both from Imperial College, University of London, UK. Prior to joining
the Franklin Templeton Group, in 1993, he worked for the Monetary Authority of
Singapore (Singapore's central bank) for five years. He has managed the Fund
since February 1996.
Management Fees
For the fiscal year ended December 31, 1997, management fees, before any advance
waiver, totaled 1.25% of the Fund's average daily net assets. The fee paid by
the Fund is higher than the advisory fees paid by most other U.S. investment
companies primarily because investing in equity securities in developing
markets, which are not widely followed by professional analysts, requires the
Investment Manager to invest additional time and incur added expense in
developing specialized resources, including research facilities. During 1997,
the Fund paid management fees totaling ( )% of its average daily net assets.
Total operating expenses (including management fees) for the fiscal year ended
December 31, 1997 were ()% of daily net assets.
TEMPLETON INTERNATIONAL FUND
EXPENSE SUMMARY
Templeton International Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 2 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton International Fund - Class 2
For a Class 2 share outstanding throughout the periods indicated
This table summarizes the Templeton International Fund's financial history of
Templeton International Fund - Class 2. The information has been audited by
McGladrey & Pullen, LLP, the Trust's independent auditors. Their audit report
for each of the last five fiscal years, appears in the financial statements in
the Trust's Annual Report for the fiscal year ended December 31, 1997. The
Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.
[to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton International Fund
The Templeton International Fund's investment objective is long-term capital
growth through a flexible policy of investing in stocks and debt obligations of
companies and governments outside the United States. In pursuit of its
investment objective, the Fund will invest at least 65% of its assets in
securities of issuers in at least three countries outside the United States. Any
income realized will be incidental.
The Fund will invest predominantly in equity securities issued by large-cap and
mid-cap companies. Large-cap companies are those which have market
capitalizations of $5 billion or more; mid-cap companies are those which have
market capitalizations of $1 billion to $5 billion. It may also invest to a
lesser degree in smaller capitalization companies, which may be subject to
different and greater risks. See "Common Risk Factors," below.
Although the Fund generally invests in common stock, it may also invest in
preferred stocks and certain debt securities such as convertible bonds. The Fund
may invest in medium and lower quality debt securities that are rated between
BBB and as low as D by S & P, and between Baa and as low as C by Moody's or, if
unrated, are of equivalent investment quality as determined by the Investment
Manager. As an operating policy, which may be changed without shareholder
approval, the Fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S & P or Baa by Moody's or, if unrated, are
of equivalent investment quality as determined by the Investment Manager. As a
fundamental policy (which may not be changed without shareholder approval) the
Fund will not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid. Bonds rated BB or lower, commonly referred to
as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. See "Common Risk Factors," and the Appendix,
below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bank time deposits in the currency of
any nation, bankers' acceptances, U.S. Government securities, corporate debt
obligations, and repurchase agreements with respect to these securities. The
Fund may also enter into firm commitment agreements, purchase securities on a
"when-issued" basis, invest in restricted securities, such as private
placements, lend its portfolio securities and borrow up to 30% of the value of
its total assets for investment purposes. See "Common Securities and Investment
Techniques." The Fund may purchase and sell financial futures contracts, stock
index futures contracts, and foreign currency futures contracts for hedging
purposes only and not for speculation. It may engage in such transactions only
if the total contract value of the futures contracts does not exceed 20% of the
Fund's total assets. See "Common Securities and Investment Techniques."
RISK CONSIDERATIONS
Templeton International Fund
The Fund carries the risks common to all stock investments, plus special risks
due to its substantial investments in foreign securities. Stocks, and other
equity securities representing an ownership interest in a corporation, have
historically outperformed other asset classes over the long term, but tend to
fluctuate more dramatically over the shorter term.
Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in smaller capitalization companies, which are subject to
different and greater risks. SEE "COMMON RISK FACTORS."
PORTFOLIO MANAGEMENT
Templeton International Fund
The Investment Manager for the Templeton International Fund is Templeton
Investment Counsel, Inc. ("TICI") 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091. TICI manages the Fund's assets and makes its investment
decisions.
The lead portfolio manager for the Templeton International Fund since July 1996
is Peter Nori. Mr. Nori, Vice President of TICI, completed Franklin's management
training program before moving into portfolio research in 1990 as an equity
analyst and co-portfolio manager of the Franklin Convertible Securities Fund. He
has exercised secondary portfolio management responsibilities for the Fund since
1995. Mr. Nori's current responsibilities include covering the data
processing/software, textile and apparel stocks, steel stocks and country
coverage of Austria. He holds a B.A. degree in Finance and an M.B.A. with an
emphasis in finance from the University of San Francisco and is a Chartered
Financial Analyst. Gary Motyl exercises secondary portfolio management
responsibilities. Mr. Motyl, Executive Vice President and Director of TICI, has
been a security analyst and portfolio manager with TICI since 1981. His research
responsibilities include the global automobile industry and country coverage of
Germany. Prior to joining the Templeton organization, Mr. Motyl worked from 1974
to 1979 as a security analyst with Standard & Poor's Corporation, and from 1979
to 1981 was a research analyst and portfolio manager with Landmark First
National Bank. Mr. Motyl holds a B.S. degree in Finance from Lehigh University
and an M.B.A. from Pace University and is a Chartered Financial Analyst.
Management Fees
Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid ( )% and ()% of its
average daily net assets in management fees and total operating expenses
(including management fees), respectively.
TEMPLETON STOCK FUND
EXPENSE SUMMARY
Templeton Stock Fund - Class 2
This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 2 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
(as a percentage of Offering Price)
Paid at time of purchase 0.00%
Paid at redemption 0.00%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
[to be supplied in later B amendment]
Management Fees ( )%
Rule 12b-1 Fees 0.25%
Other Expenses ( )%
TOTAL FUND OPERATING EXPENSES ( )%
C. EXAMPLE
Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund. [to be supplied in later B amendment]
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$ ( ) $ ( ) $ ( ) $ ( )
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.
FINANCIAL HIGHLIGHTS
Templeton Stock Fund - Class 2
For a Class 2 share outstanding throughout the periods indicated
This table summarizes the financial history of Templeton Stock Fund - Class 2.
The information has been audited by McGladrey & Pullen, LLP, the Trust's
independent auditors. Their audit report for each of the last five fiscal years,
appears in the financial statements in the Trust's Annual Report for the fiscal
year ended December 31, 1997. The Trust's annual report also includes more
information about the Fund's performance. For a free copy, please call
1-800-774-5001. [to be supplied in later B amendment]
INVESTMENT OBJECTIVE AND POLICIES
Templeton Stock Fund
The Templeton Stock Fund's investment objective is capital growth through a
policy of investing primarily in common stocks issued by companies, large and
small, in various nations throughout the world. In the pursuit of its investment
objective, the Fund will normally maintain at least 65% of its assets in common
and preferred stocks. The Fund may also invest in securities convertible into
common stocks rated in any category by Standard & Poor's Corporation ("S&P") or
Moody's Investors Service, Inc. ("Moody's") and securities which are unrated by
any rating agency. See the Appendix in the Statement of Additional Information
for a description of the S&P and Moody's ratings. Current income will usually be
a less significant factor in selecting investments for the Fund. The Fund will
invest predominantly in equity securities issued by large-cap and mid-cap
companies. Large-cap companies are those which have market capitalizations of $5
billion or more; mid-cap companies are those which have market capitalizations
of $1 billion to $5 billion. It may also invest to a lesser degree in smaller
capitalization companies, which may be subject to different and greater risks.
See "Common Risk Factors," below.
The Fund and its investment manager, Templeton Investment Counsel, Inc. ("TICI"
or the "Investment Manager"), may, from time to time, use various methods of
selecting securities for the Fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the Fund's portfolio. There can be no assurance that the Fund will
achieve its investment objective.
Subject to its policy of investing 65% of its total assets in equity securities,
the Fund may invest in debt obligations, including convertible debt obligations.
These debt obligations may include medium and lower quality debt securities that
are rated between BBB and as low as D by S & P, and between Baa and as low as C
by Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. As an operating policy, which may be changed without
shareholder approval, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S & P or Baa by Moody's or, if
unrated, are of equivalent quality as determined by the Investment Manager. As a
fundamental policy (which may not be changed without shareholder approval) the
Fund will not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid. Bonds rated BB or lower, commonly referred to
as "junk bonds," are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. See "Common Risk Factors," and the Appendix,
below.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bankers' acceptances, U.S. Government
securities, corporate debt obligations, and repurchase agreements with respect
to these securities. The Fund may also enter into firm commitment agreements,
purchase securities on a "when-issued" basis, invest in restricted securities,
such as private placements, borrow up to 30% of the value of its total assets
for investment purposes and lend its portfolio securities. (See "Common
Securities and Investment Techniques.") The Fund may also purchase and sell
stock index futures contracts for hedging purposes only and not for speculation.
It may engage in such transactions only if the total contract value of the
futures contracts does not exceed 20% of the Fund's total assets. (See "Common
Securities and Investment Techniques.")
RISK CONSIDERATIONS
Templeton Stock Fund
The Fund carries the risks common to all stock investments, plus special risks
due to its substantial investments in foreign securities. Stocks, and other
equity securities representing an ownership interest in a corporation, have
historically outperformed other asset classes over the long term, but tend to
fluctuate more dramatically over the shorter term.
Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in smaller capitalization companies, which are subject to
different and greater risks. SEE "COMMON RISK FACTORS."
PORTFOLIO MANAGEMENT
Templeton Stock Fund
The Investment Manager for the Templeton Stock Fund is Templeton Investment
Counsel, Inc.,("TICI") 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091. TICI manages each Fund's assets and makes its investment decisions.
The lead portfolio manager for the Templeton Stock Fund since 1995 is Mark R.
Beveridge. Mr. Beveridge, Vice President of TICI, joined the Templeton
organization in 1985. He has responsibility for the industrial component
appliances/ household durables industries, and has market coverage of Argentina,
Denmark and Thailand. Prior to joining the Templeton organization, Mr. Beveridge
was a principal with a financial accounting software firm based in Miami,
Florida. He has a Bachelors Degree in Business Administration with emphasis in
finance from the University of Miami.
William T. Howard Jr., Vice President of TICI and Howard J. Leonard, Senior Vice
President of TICI, exercise secondary portfolio management responsibilities. Mr.
Howard holds a BA in international studies from Rhodes College and an MBA in
finance from Emory University. He is a Chartered Financial Analyst and a member
of the Financial Analyst Society. Before joining the Templeton Organization in
1993, Mr. Howard was a portfolio manager and analyst with the Tennessee
Consolidated Retirement System in Nashville, Tennessee, where he was responsible
for research and management of the international equity portfolio, and
specialized in the Japanese equity market. As a portfolio manager and research
analyst with Templeton, Mr. Howard's research responsibilities include the
transportation, shipping, machinery and engineering industries worldwide. He is
also responsible for country coverage of both Japan and New Zealand. He has
managed the Fund since June 1996. Mr. Leonard has research responsibilities for
the global forest products, money management and airline industries, and
coverage of Indonesia, Switzerland, Brazil and India. Prior to joining the
Templeton organization in 1989, Mr. Leonard was director of investment research
at First Pennsylvania Bank, where he was responsible for equity and fixed income
research activities and its proxy voting service for large pension plan
sponsors. He also previously worked at Provident National Bank as a security
analyst. Mr. Leonard holds a B.B.A. in Finance and Economics from Temple
University.
Management Fees
Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid 0.47% and ()% of its
average daily net assets in management fees and total operating expenses
(including management fees) respectively.
COMMON SECURITIES AND INVESTMENT TECHNIQUES
This section describes certain types of securities and investment techniques
which can be used by more than one Fund. All policies and percentage limitations
are considered at the time of purchase and refer to total assets, unless
otherwise specified. Each of the Funds will not necessarily use the strategies
described to the full extent permitted unless the Managers believe that doing so
will help a Fund reach its objectives, and not all instruments or strategies
will be used at all times. In the event of a corporate restructuring or
bankruptcy reorganization of an issuer whose securities are owned by a Fund, the
Fund may receive securities different from those originally purchased, e.g.,
common stock that is not dividend paying, bonds with a lower coupon or more
junior status, convertible securities or even conceivably real estate. The Fund
is not obligated to sell such securities immediately, if the Manager believes,
based on its own analysis, that the longer term outlook is favorable and there
is the potential for a higher total return by holding such investments.
Each Fund is also subject to investment restrictions that are described under
the heading "Investment Restrictions" in the SAI. Those investment restrictions
so designated and the investment objective of each Fund are "fundamental
policies" of each Fund, which means that they may not be changed without a
majority vote of Shareholders of the Fund. With the exception of a Fund's
investment objective and those restrictions specifically identified as
fundamental, all investment policies and practices described in this Prospectus
and in the SAI are not fundamental, meaning that the Board of Trustees may
change them without Shareholder approval.
Borrowing
Under federal securities laws, a Fund may borrow from banks only, and is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on each Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
Convertible Securities
With the exception of the Money Market Fund, all Funds may invest in convertible
securities. A convertible security is generally a debt obligation or preferred
stock that may be converted within a specified period of time into a certain
amount of common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when interest
rates decline and decrease in value when interest rates rise. Similar to a
common stock, the value of a convertible security tends to increase as the
market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which a Portfolio may invest are subject to
the same rating criteria and investment policies as that Portfolio's investments
in debt obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for each Portfolio's financial reporting, credit
rating, and investment limitation purposes.
Certain Funds, consistent with their investment policies, may also invest in
enhanced or synthetic convertible securities. A detailed discussion of these
securities appears in the SAI. None of the Funds currently expects to make
significant use of these securities.
Debt Securities
Debt securities may include many types of debt obligations of both domestic and
foreign issuers such as bonds, debentures, notes, commercial paper, structured
investments and obligations issued or guaranteed by governments or government
agencies or instrumentalities. The market value of debt securities generally
varies in response to changes in interest rates and the financial condition of
each issuer. During periods of declining interest rates, the value of debt
securities generally increases. Conversely, during periods of rising interest
rates, the value of such securities generally declines. These changes in market
value will be reflected in the Fund's net asset value.
Each Fund's policy regarding investments in lower-rated debt obligations is
stated above. Lower-rated debt obligations, commonly known as "junk bonds," are
rated below BBB by Moody's or Baa by S & P, or in unrated debt obligations of
similar quality as determined by the Investment Manager. Bonds rated BB or below
are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
may be in default.
Issuers of bonds rated Ca may often be in default. Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by each Fund's Investment Manager to determine that the
planned investment is sound. Unrated debt securities are not necessarily of
lower quality than rated securities but they may not be attractive to as many
buyers. Many debt obligations of foreign issuers, and especially developing
markets issuers, are either (i) rated below investment grade or (ii) not rated
by U.S. rating agencies so that their selection depends on the Investment
Manager's individual analysis.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption
"Common Risk Factors" and in the SAI. For a description of debt securities
ratings, see the Appendix.
BANK OBLIGATIONS. All Funds may invest in certificates of deposit, which are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. The Funds may invest
in bankers' acceptances, which are negotiable drafts or bills of exchange
normally drawn by an importer or exporter to pay for specific merchandise and
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity. The
Funds may invest in dollar-denominated certificates of deposit and bankers'
acceptances of foreign and domestic banks having total assets in excess of $1
billion. The Funds may also invest in certificates of deposit of federally
insured savings and loan associations having total assets in excess of $1
billion. Certain Funds may also hold cash and time deposits with banks in the
currency of any major nation.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). Certain Funds may invest in CMOs,
which are fixed-income securities collateralized by pools of mortgage loans
created by commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other issuers in the United States.
In effect, CMOs "pass-through" the monthly payments made by individual borrowers
on their mortgage loans. Timely payment of interest and principal (but not the
market value) of these pools is supported by various forms of insurance or
guarantees issued by U.S. Government agencies, private issuers, and mortgage
poolers; however, the obligation itself is not guaranteed. If the collateral
securing the obligations is insufficient to make payment on the obligation, a
holder could sustain a loss. In addition, a Fund may buy CMOs without insurance
or guarantees if, in the opinion of the Investment Manager, the sponsor is
creditworthy. The ratings of the CMOs will be consistent with the ratings
criteria of the Fund. Prepayments of the mortgages included in the mortgage pool
may influence the yield of the CMO. Prepayments usually increase when interest
rates are decreasing, thereby decreasing the life of the pool. Reinvestment of
prepayments may be at a lower rate than that on the original CMO. As a result,
the value of CMOs decrease like other debt securities when interest rates rise,
but when interest rates decline, they may not increase as much as other debt
securities, due to the prepayment feature.
COMMERCIAL PAPER. All Funds may invest in commercial paper. Investments in
commercial paper are limited to obligations rated Prime-1 or Prime-2 by Moody's
or A-1 or A-2 by S&P or, if not rated by Moody's or S&P, issued by companies
having an outstanding debt issue currently rated Aaa or Aa by Moody's or AAA or
AA by S&P. See the Appendix in the SAI for a description of these ratings.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government securities,
which are obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. Some U.S. Government securities, such as Treasury bills
and bonds, which are direct obligations of the U.S. Treasury, and Government
National Mortgage Association ("GNMA") certificates, the principal and interest
of which the Treasury guarantees, are supported by the full faith and credit of
the Treasury; others, such as those of Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others are supported only by the credit of the instrumentality. GNMA
certificates are securities representing part ownership of a pool of mortgage
loans on which interest and principal payments are guaranteed by the Treasury.
Principal is repaid monthly over the term of the loan. Expected payments may be
delayed due to the delays in registering newly traded certificates. The mortgage
loans will be subject to normal principal amortization and may be prepaid prior
to maturity. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates.
Depositary Receipts
Each Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a United States corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of each
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
Diversification
Each Fund is diversified under federal securities law and may not, with respect
to 75% of its total assets, purchase the securitei of any one issuer (other than
the U.S. Government) if more than 5% of the value of the Fund's assets would be
invested in such issuer. Each Fund will also comply with diversification
requirements under federal tax laws related to regulated investment companies
and variable contracts issued by insurance companies. See "Federal Income Tax
Status," below and "Investment Objectiv es and Policies" in the SAI.
Forward Foreign Currency Exchange Contracts and Options on Foreign Currencies
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
The Investment Manager intends to manage each Fund's exposure to various
currencies to take advantage of different yield, risk, and return
characteristics that different currencies, currency denominations, and countries
can provide for U.S. investors. With respect to debt securities, the Investment
Managers, may from time to time make extensive use of forward currency exchange
contracts or options on currencies for hedging purposes.
A Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. The Fund will generally not enter into a forward contract
with a term of greater than one year. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers.
Each Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security or, when the Investment Manager believes that the currency
of a particular foreign country may suffer or enjoy a substantial movement
against another currency, it may enter into a forward contract to sell or buy
the former foreign currency (or another currency which acts as a proxy for that
currency) approximating the value of some or all of a Fund's portfolio
securities denominated in such foreign currency. This latter investment practice
is generally referred to as "cross-hedging." A Fund has no specific limitation
on the percentage of assets it may commit to forward contracts, except that a
Fund will not enter into a forward contract if the amount of assets set aside to
cover the contract would impede portfolio management or the Fund's ability to
meet redemption requests. Each Fund may also purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases in the
U.S. dollar cost of foreign securities to be acquired. There is no assurance
that the Investment Managers' hedging strategies will be successful.
Futures Contracts
For hedging purposes only, certain Funds may buy and sell financial futures
contracts and foreign currency futures contracts. Also, for hedging purposes
only, the Funds may purchase and sell bond index futures contracts. A financial
futures contract is an agreement between two parties to buy or sell a specified
debt security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When a Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. A Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, a Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account, for all Funds must be equal to the daily market value of all
outstanding futures contracts less any amounts deposited as margin. The value of
the underlying securities on which futures contacts will be written at any one
time will not exceed 25% of the total assets of the Developing Markets Fund.
Loans of Portfolio Securities
Each Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets to generate
income. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. Each Fund may terminate the loans at any time
and obtain the return of the securities loaned within five business days. A Fund
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, a Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of collateral falls below the market value of the borrowed
securities.
Portfolio Turnover
Each Fund may purchase and sell securities without regard to the length of time
the security has been held, and the frequency of Portfolio transactions
(turnover rate) will vary from year to year, depending on market conditions.
Portfolio turnover could be greater in periods of unusual market movement and
volatility. The Managers will weigh the potential benefits of any short-term
trading against the higher transaction costs associated with a higher turnover
rate. Unless otherwise indicated in the discussion for each Fund, it is
anticipated that each Fund's annual turnover rate generally will not exceed
100%.
Higher portfolio turnover rates generally increase transaction costs, which are
Portfolio expenses, but would not create capital gains for investors because of
the tax-deferred status of variable annuity and variable life insurance
investments. Portfolio turnover rates for recent years are shown in the
"Financial Highlights." More information is in the SAI.
Repurchase Agreements
Each Fund may invest in repurchase agreements. When a Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security, a
Fund may experience delay or difficulty in exercising its rights to realize upon
the security and might incur a loss if the value of the security should decline,
as well as incur disposition costs in liquidating the security.
Restricted Securities
Certain Funds may invest in restricted securities, which are securities subject
to legal or contractual restrictions on their resale, such as private
placements. Such restrictions might prevent the sale of restricted securities at
a time when sale would otherwise be desirable. No restricted securities and no
securities for which there is not a readily available market ("illiquid assets")
will be acquired by a Fund if such acquisition would cause the aggregate value
of illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
Temporary Investments
For temporary defensive purposes, each Fund may invest up to 100% of its total
assets in the following money market securities, denominated in U.S. dollars or
in the currency of any foreign country, issued by entities organized in the
United States or any foreign country: short-term (less than twelve months to
maturity) and medium-term (not greater than five years to maturity) obligations
issued or guaranteed by the U.S. Government or the governments of foreign
countries, their agencies or instrumentalities; finance company and corporate
commercial paper, and other short-term corporate obligations, in each case rated
Prime-1 by Moody's or A or better by S&P or, if unrated, of comparable quality
as determined by the Investment Manager; obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks; and repurchase
agreements with banks and broker-dealers with respect to such securities.
Trade Claims
Trade claims are purchased from creditors of companies in financial difficulty.
For purchasers such as a Portfolio, trade claims offer the potential for profits
since they are often purchased at a significantly discounted value and,
consequently, may generate capital appreciation if the value of the claim
increases as the debtor's financial position improves. If the debtor is able to
pay the full obligation on the face of the claim as a result of a restructuring
or an improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price. An investment in trade claims is
speculative and carries a high degree of risk. There can be no guarantee that
the debt issuer will ever be able to satisfy the obligation on the trade claim.
Trade claims are not regulated by federal securities laws or the SEC. Currently,
trade claims are regulated primarily by bankruptcy laws. Because trade claims
are unsecured, holders may have a lower priority in terms of payment than most
other creditors in a bankruptcy proceeding.
Warrants
A warrant is typically a long-term option issued by a corporation which gives
the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
an expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If a Portfolio does not exercise or dispose of a
warrant prior to its expiration, it will expire worthless.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" basis. New issues of
certain debt securities are often offered on a when-issued basis, meaning that
the payment obligation and the interest rate are fixed at the time the buyer
enters into the commitment, but delivery and payment for the securities normally
takes place after the date of the commitment to purchase. The value of
when-issued securities may vary prior to and after delivery depending on market
conditions and changes in interest rate levels. However, a Fund will not accrue
any income on these securities prior to delivery. The Funds will maintain in a
segregated account with their Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
COMMON RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds; nor can
there be any assurance that a Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Funds can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Funds' portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of each Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which a Fund is invested in equity
securities may also be reflected in declines in the price of the Shares of the
Fund. Changes in prevailing rates of interest in any of the countries in which a
Fund is invested in fixed income securities will likely affect the value of such
holdings and thus the value of the Funds' Shares. Increased rates of interest
which frequently accompany inflation and/or a growing economy are likely to have
a negative effect on the value of a Fund's Shares. In addition, changes in
currency valuations will affect the price of Shares of the Funds.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Managers will not always be
profitable or prove to have been correct. The Funds are not intended to be
complete investment programs.
Foreign Securities
The Funds are authorized to purchase securities in any foreign country,
developed or underdeveloped. An investor should consider carefully the risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. These risks are often heightened for investments in developing
markets, including certain Eastern European countries. See "Investment
Objectives and Policies--Risk Factors" in the SAI. There is the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations (including, for example, withholding taxes on interest
and dividends) or other taxes imposed with respect to investments in foreign
nations, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), foreign investment controls on daily
stock movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Funds may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security of, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
As a non-fundamental policy, the Funds will limit their investments in Russian
securities to 5% of their total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss (including risk of total loss)
arising out of Russia's system of share registration and custody. For more
information on these risks and other risks associated with Russian securities,
please see "Investment Objectives and Policies--Risk Factors" in the SAI.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Funds may
invest may also be smaller, less liquid, and subject to greater price volatility
than those in the United States. The Funds may invest in Eastern European
countries, which involves special risks that are described under "Investment
Objectives and Policies--Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations may also be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
The Funds will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when a Fund converts assets from one currency to another.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. A Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustment in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
Hong Kong reverted to the sovereignity of China on July 1, 1997. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of a Fund's investments.
Closed-End Investment Companies
Some countries, such as South Korea, Chile and India, have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. Subject to federal securities laws, certain
Funds which are authorized to invest in developing markets securities, may
invest in securities of closed-end investment companies. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares of
closed-end investment companies, Shareholders would bear both their
proportionate share of expenses of the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
Lower Rated Debt Obligations
Certain Funds are authorized to invest in medium quality or high-risk, lower
quality debt securities that are rated between BBB and as low as D by S&P, and
between Baa and as low as C by Moody's or, if unrated, are of equivalent
investment quality as determined by the Investment Manager. See "Investment
Objectives and Policies--Debt Securities" in the SAI for descriptions of debt
securities rated lower than BBB by S&P and Baa by Moody's.
High-risk, lower quality debt securities commonly referred to as "junk bonds,"
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and may be in default. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and the Funds' ability to dispose of particular issues, when
necessary, to meet a Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for a Fund to obtain market
quotations based on actual trades for purposes of valuing the Funds' portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. Investments may also be evaluated in the context of economic
and political conditions in the issuer's domicile, such as the inflation rate,
growth prospects, global trade patterns and government policies. In the event
the rating on an issue held in a Fund's portfolio is changed by the rating
service, such change will be considered by a Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. If a Fund
had a 12 month dollar weighted average of more than 5% of its assets invested in
debt obligations below investment grade in the most recent fiscal year, an Asset
Composition Table is included under the Fund's "Risk Considerations," above.
Small Capitalization Issuers
Certain Funds may invest in companies with relatively small revenues and limited
product lines. Smaller capitalization companies may lack depth of management,
they may be unable to internally generate funds necessary for growth or
potential development or to generate such funds through external financing on
favorable terms. Due to these and other factors, smaller companies may suffer
significant losses, as well as realize substantial growth.
Options and Futures Contracts
Successful use of forward contracts, options and futures contracts are subject
to special risk considerations and transaction costs. A liquid secondary market
for forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in a
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of a Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, a Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
PURCHASE OF SHARES
Class 2 shares of each Fund are offered on a continuous basis at their net asset
value only to separate accounts ("Separate Accounts") of insurance companies
("Insurance Companies") to serve as the underlying investment vehicle for both
variable annuity and variable life insurance contracts ("Contracts").
Individuals may not purchase these shares directly from each Fund. Please read
the prospectus of the Insurance Company Separate Account for more information on
the purchase of each Fund's Class 2 shares.
The Trust serves as investment vehicle for both variable annuity and variable
life insurance contracts, and for both variable life insurance contracts of an
Insurance Company and other variable contracts of unaffiliated Insurance
Companies. Therefore, the Trust's Board of Trustees monitors events in order to
identify any material conflicts between variable annuity contract owners and
variable life contract owners and/or between Separate Accounts of different
Insurance Companies, as the case may be, and will determine what action, if any,
should be taken in the event of such a conflict. Although the Trust does not
currently foresee any disadvantages to contract owners, an irreconcilable
material conflict may conceivably arise between contract owners of different
separate accounts investing in the Funds due to differences in tax treatment,
the management of investments, or other considerations. If such a conflict were
to occur, one of the Separate Accounts might withdraw its investment in a Fund.
This might force the Fund to sell portfolio securities at disadvantageous
prices.
Initial and subsequent payments allocated to the Class 2 shares of a Fund may be
subject to limits applicable in the Contract purchased.
NET ASSET VALUE
The net asset value per share of each class of a Fund is determined as of the
close of the New York Stock Exchange ("NYSE"), normally generally 4:00 p.m.,
Eastern time. The Net Asset Value of all outstanding shares of each class of a
Fund is calculated on a pro rata basis. It is based on each class' proportionate
participation in a Fund, determined by the value of the shares of each class. To
calculate the Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares of the class outstanding. The assets
in a Fund's portfolio are valued as described under "Purchase, Redemption and
Pricing of Shares" in the SAI.
REDEMPTION OF SHARES
The Trust will redeem all full and fractional Shares presented for redemption on
any business day. Redemptions are effected at the per Share net asset value next
determined after receipt of proper notice of the redemption. Redemption proceeds
normally will be paid to the Insurance Company within seven days following
receipt of instructions in proper form. The right of redemption may be suspended
by the Trust when the NYSE is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the Securities and Exchange Commission,
making disposal of portfolio securities or valuation of net assets not
reasonably practicable, and whenever the Securities and Exchange Commission has
by order permitted such suspension or postponement for the protection of
shareholders. The Trust will redeem Shares of a Fund solely in cash up to the
lesser of $250,000 or 1% of its net assets during any 90-day period for any one
Shareholder. In consideration of the best interests of the remaining
Shareholders, the Trust reserves the right to pay any redemption price exceeding
this amount in whole or in part by a distribution in kind of securities held by
a Fund in lieu of cash. It is highly unlikely that Shares would ever be redeemed
in kind. If Shares are redeemed in kind, however, the redeeming Shareholder
should expect to incur transaction costs upon the disposition of the securities
received in the distribution.
Please refer to the prospectus of your Insurance Company's Separate Account for
information on how to redeem Shares of a Fund.
EXCHANGES
Class 2 shares of a Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one
class or fund and a purchase of shares of one or more of the other classes or
funds and are effected at the respective net asset value per share of the class
of each fund on the date of the exchange. Please refer to the prospectus of your
Insurance Company's Separate Account for more information concerning exchanges.
MANAGEMENT OF THE TRUST
The Board
The Board oversees the management of the Trust and elects its officers. The
officers are responsible for each Fund's day-to-day operations. The Board also
monitors each Fund to ensure no material conflicts exist among the classes of
shares. While none is expected, the Board will act appropriately to resolve any
material conflict that may arise.
Investment Managers
Each Fund's Investment Manager also performs similar services for other funds.
Each Fund's Investment Manager is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together the Investment Managers and their affiliates manage over
$179 billion in assets. The Templeton organization has been investing globally
since 1940. TICI and its affiliates have offices in Argentina, Australia,
Bahamas, Canada, France, Germany, Hong Kong, India, Italy, Luxembourg, Poland,
Russia, Scotland, Singapore, South Africa, U.S., and Vietnam. Please see
"Investment Management and Other Services" and "Brokerage Allocation" in the SAI
for information on securities transactions and a summary of the Trust's Code of
Ethics.
Administrative Services
Templeton Funds Annuity Company ("Administrator"), 700 Central Avenue, St.
Petersburg, Florida 33701, telephone (800) 774-5001 or (813) 823-8712, provides
certain administrative services and facilities for each Fund.
The Administrator receives a monthly fee equivalent on an annual basis to 0.15%
of the average daily net assets of the Trust, reduced to 0.135% of such assets
in excess of $200 million, to 0.10% of such assets in excess of $700 million,
and to 0.075% of such assets in excess of $1.2 billion. Each Fund in the Trust,
except those which had not commenced operations, paid the Administrator fees of
( )% of its average daily net assets during the fiscal year ended December 31,
1997.
Portfolio Transactions
Each Investment Manager tries to obtain the best execution on all transactions.
If an Investment Manager believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.
Distributor
The Trust's principal underwriter is Franklin Templeton Distributors, Inc., 700
Central Avenue, St. Petersburg, Florida 33701, toll free telephone (800)
292-9293.
DISTRIBUTION PLAN
Class 2 of each Fund has a distribution plan or "Rule 12b-1 Plan," under which
it may pay Distributors, the Insurance Companies or others for activities
primarily intended to sell Class 2 shares or Contracts offering the Class 2
shares. Payments made under a Plan may be used for, among other things, the
printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, education of
contract owners or dealers and their representatives, and other distribution
related expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these
Contracts. Payments made under a Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as a Fund or a Contract may require, or maintaining customer accounts and
records. Payments under each Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
(0.15% for the Bond Fund) per year of Class 2's average daily net assets. Please
see the SAI for additional information.
DIVIDENDS AND DISTRIBUTIONS
Each Fund, except the Money Fund, normally intends to pay annual dividends
representing substantially all of its net investment income and to distribute
annually any net realized capital gains. Dividends and capital gains are
calculated and distributed the same way for each Fund and each class of shares.
The amount of any income dividends per share will differ for each class,
however, generally due to the difference in the applicable Rule 12b-1 fees.
Class 1 shares are not subject to Rule 12b-1 fees.
Any distributions made by the Funds will be automatically reinvested in
additional Shares of the same class of the Funds, unless an election is made on
behalf of a Shareholder to receive distributions in cash. Dividends or
distributions by the Funds will reduce the per share net asset value by the per
share amount so paid.
FEDERAL INCOME TAX STATUS
Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Funds so qualify,
they generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, each Fund must, among other things, meet certain source of income
requirements. In addition, each Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of each Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Funds on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Funds.
Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the Shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by a Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the Shares. Any distributions that are not from a Fund's investment company
taxable income or net capital gain may be characterized as a return of capital
to shareholders or, in some cases, as capital gain. Reference is made to the
prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code a Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that a Fund will be able to operate as currently described in the Prospectus, or
that the Trust will not have to change the Funds, investment objective or
investment policies. While a Fund's investment objective is fundamental and may
be changed only by a vote of a majority of its outstanding Shares, the Trustees
have reserved the right to modify the investment policies of the Funds as
necessary to prevent any such prospective rules and regulations from causing the
contract owners to be considered the owners of the Shares of the Fund underlying
the Separate Account.
OTHER INFORMATION
The Trust's Organization
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of ten separately managed funds. Each class of each fund
in the Trust is sold only to Insurance Company Separate Accounts to serve as an
investment vehicle for variable annuity and variable life insurance contracts
and is offered through a form of prospectus containing the classes and funds
available to each contract. The Templeton Money Market Fund has a single class
of shares. The other nine funds ("Multiclass Funds") offer two classes of
shares, Class 1 and Class 2. All shares of the Multiclass Funds purchased before
May 1, 1997, when the Trust first issued class 2 shares, are considered Class 1
shares. Class 2 shares of the Multiclass Funds are subject to a Rule 12b-1 fees
of 0.25% (0.15% in the case of the Bond Fund) per year of Class 2's average
daily net assets. Rule 12b-1 fees will affect performance of Class 2 Shares.
Shares of the Templeton Money Market Fund and Class 1 Shares of the Multiclass
Funds are not subject to Rule 12b-1 fees. The Board of Trustees may establish
additional funds or classes in the future.
The capitalization of the Trust consists solely of an unlimited number of Shares
of beneficial interest with a par value of $0.01 each. When issued, Shares of
the Trust are fully paid, non-assessable by the Trust and freely transferable.
Unlike the stockholder of a corporation, Shareholders could under certain
circumstances be held personally liable for the obligations of the Trust. The
Declaration of Trust, however, disclaims liability of the Shareholders, Trustees
or officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust. The Declaration of Trust provides
for indemnification out of Trust property for all loss and expense of any
Shareholder held personally liable for the obligations of the Trust. The risk of
a Shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations and thus should be considered remote.
Shareholders of the Trust are given certain voting rights. Shares of each class
of a fund represent proportionate interests in the assets of a fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by federal securities law.
Each Share of each class of a fund will be given one vote, unless a different
allocation of voting rights is required under applicable law for a mutual fund
that is an investment medium for variable life insurance or annuity contracts.
The Separate Accounts, as Shareholders of the Trust, are entitled to vote the
Shares of the Trust at any regular and special meeting of the Shareholders of
the Trust. However, the Separate Accounts will generally vote their shares in
accordance with instructions received from owners of the variable contracts. See
the Separate Account prospectus for more information regarding the pass-through
of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an Insurance Company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
For more information on the Trust, a Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030--toll free telephone (800) 774-5001 or (813) 823-8712.
Performance Information
From time to time, each class of a Fund advertises its performance. Performance
information for a class of the Fund will generally not be advertised unless
accompanied by comparable performance information for a Separate Account to
which a Fund offers shares of that class.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by a Fund.
Quotations of yield or total return for a class of a Fund will not take into
account charges and deductions against any Separate Account to which the Funds'
shares are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a Separate Account will take
such charges into account.
The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.
Statements and Reports
The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
Appendix
Description of Bond Ratings*
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest. AA - Bonds
rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong and, in the majority of instances, differ
from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid. D - Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Templeton Variable Products Series Funds
STATEMENT OF
ADDITIONAL INFORMATION 500 East Broward Boulevard
MAY 1, 1998 Fort Lauderdale, Florida
33394-3091
Table of Contents Page
Introduction..........................................
Investment Objectives and Policies ...................
Investment Restrictions ..............................
Officers and Trustees.................................
Investment Management and
Other Services.......................................
Brokerage Allocation .................................
Portfolio Turnover ...................................
Summary of Code of Ethics.............................
Purchase, Redemption and
Pricing of Shares ...................................
Redemptions in Kind...................................
Class 2 Distribution Plan.................... ..
Tax Status ...........................................
Description of Shares ................................
Performance Information ..............................
Financial Statements .................................
INTRODUCTION Templeton Variable Products Series Fund (the "Trust") was
organized as a Massachusetts business trust on February 25, 1988 and is
registered under the Investment Company Act of 1940 (the "1940 Act") as an
open-end diversified management investment company. The Trust currently has
ten series of Shares: Templeton Money Market ("Money Market") Fund,
Templeton Bond ("Bond") Fund, Templeton Stock ("Stock") Fund, Templeton
Asset Allocation ("Asset Allocation") Fund, Templeton Developing Markets
("Developing Markets") Fund, Franklin Growth Investments ("Growth") Fund,
Mutual Discovery Investments ("Mutual Discovery") Fund, Mutual Shares
Investments ("Mutual Shares") Fund, Franklin Small Cap Investments Fund
("Small Cap") and Templeton International ("International") Fund
(collectively, the "Funds"). Each Fund, except the Money Market Fund, has
two classes of shares, Class 1 and Class 2. Each class of each Fund has a
separate prospectus. All shares of the Funds are sold only to insurance
company separate accounts to serve as the investment vehicle for
certain variable annuity and life insurance contracts. Not all of the
Funds or Classes are available as an investment vehicle for all
contracts. Please refer to the contract prospectus for information
concerning the availability of each class of each Fund.
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1998, IS NOT A
PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN
SET FORTH IN THE PROSPECTUSES. THIS SAI IS INTENDED TO PROVIDE YOU WITH
ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST
AND THE FUNDS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF
EACH FUND AND CLASS IN WHICH YOU MAY BE INTERESTED. EACH PROSPECTUS IS
DATED MAY 1, 1998, MAY BE AMENDED FROM TIME TO TIME, AND MAY BE OBTAINED
WITHOUT CHARGE UPON REQUEST TO FRANKLIN TEMPLETON DISTRIBUTORS, INC., 100
FOUNTAIN PARKWAY, ST. PETERSBURG, FLORIDA 33716-1205, TOLL FREE
TELEPHONE: (800) 774-5001.
INVESTMENT OBJECTIVES AND POLICIES
Investment Policies. The investment objective and policies of each Fund
are described in each Fund's Prospectus under the heading "Investment
Objective and Policies."
CONVERTIBLE SECURITIES. The Funds may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise.
Similar to a common stock, the value of a convertible security tends to
increase as the market value of the underlying stock rises, and it tends to
decrease as the market value of the underlying stock declines. Because its
value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as
its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The convertible debt obligations in which the Funds may invest are subject
to the same rating criteria and investment policies as the Funds' investments
in debt obligations. The issuer of a convertible security may be important
in determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only
after a specified date and under circumstances established at the time the
security is issued.
However, unlike convertible debt obligations, convertible preferred stocks
are equity securities. As with common stocks, preferred stocks are
subordinated to all debt obligations in the event of insolvency, and an
issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on
the issuer's business prospects for an indefinite period of time. In
addition, distributions from preferred stock are dividends, rather than
interest payments, and are usually treated as such for corporate tax
purposes. For these reasons, convertible preferred stocks are treated as
preferred stocks for the Funds' financial reporting, credit rating, and
investment limitation purposes.
DEBT SECURITIES. Each Fund may invest in debt securities to the extent
provided in the Fund's prospectus. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the
value of debt securities generally increases. Conversely, during periods of
rising interest rates, the value of such securities generally declines.
These changes in market value will be reflected in a Fund's net asset value.
Bonds rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or
BB or lower by Standard & Poor's Corporation
("S&P") are predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation and may be in default. Bonds which are rated C by Moody's are the
lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Bonds rated C by S&P are obligations on which no interest is being paid.
For a full description of each debt securities rating, see the Appendix.
Although they may offer higher yields than do higher rated securities, low
rated and unrated debt securities generally involve greater volatility of
price and risk of principal and income, including the possibility of default
by, or bankruptcy of, the issuers of the securities. In addition, the
markets in which low rated and unrated debt securities are traded are more
limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish a Fund's
ability to sell the securities at fair value either to meet redemption
requests or to respond to a specific economic event such as a deterioration
in the creditworthiness of the issuer. Reduced secondary market liquidity
for certain low rated or unrated debt securities may also make it more
difficult for a Fund to obtain accurate market quotations for the purposes of
valuing a Fund's portfolio. Market quotations are generally available on
many low rated or unrated securities only from a limited number of dealers
and may not necessarily represent firm bids of such dealers or prices for
actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of a Fund to
achieve its investment objective may, to the extent of investment in low
rated debt securities, be more dependent upon such credit worthiness analysis
than would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments,
but more sensitive to adverse economic downturns or individual
corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline
in low rated debt securities prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low rated debt
securities defaults, a Fund may incur additional expenses to seek recovery.
Depositary Receipts. The Funds may purchase sponsored or unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and Global Depositary Receipts ("GDRs") (collectively,
"Depositary Receipts"). ADRs are Depositary Receipts typically issued by a
U.S. bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also
may be issued by U.S. banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a U.S. corporation.
Generally, Depositary Receipts in registered form are designed for use in
the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States.
Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be
converted. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in
the creation of the program. Although regulatory requirements with
respect to sponsored and unsponsored programs are generally similar, in
some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers
of securities underlying unsponsored programs and there may not be
a correlation between such information and the market value of the
Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of
the Funds' investment policies, the Funds' investments in Depositary
Receipts will be deemed to be investments in the underlying securities.
Diversification. Each Fund intends to diversify its investments to meet
the requirements under Section 5 of the 1940 Act, under Section 851 of the
Code relating to regulated investment companies, and under Section 817 of
the Code relating to the treatment of variable contracts issued by insurance
companies.
As diversified funds under the 1940 Act, each Fund may not, with respect
to 75% of its total assets, purchase the securities of any one issuer
(except U.S. Government Securities) if more than 5% of the value of the
Fund's assets would be invested in such issuer.
In order to comply with the diversification requirements under section 851
of the Code, each Fund will limit its investments so that, at the close of
each quarter of the taxable year, (i) not more than 25% of the market
value of each Fund's total assets will be invested in the securities
of a single issuer, and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will
be invested in the securities of a single issuer and each Fund will not own
more than 10% of the outstanding voting securities of a single issuer. A
Fund's investments in U.S. Government Securities are not subject to these
limitations.
In order to comply with the Code's diversification requirements under
Section 817, each Fund will diversify its investments such that (i) no more
than 55% of the Fund's assets is represented by any one investment; (ii) no
more than 70% of the Fund's assets is represented by any two investments;
(iii) no more than 80% of the Fund's assets is represented by any three
investments; and (iv) no more than 90% of the Fund's assets is
represented by any four investments. In the case of Funds investing in
obligations of U.S. government agencies or instrumentalities, each agency or
instrumentality is treated as a separate issuer for purposes of the above
rules.
Foreign Securities - General. An investor should consider carefully the
risks involved in investing in securities issued by companies and
governments of foreign nations, which are in addition to the usual
risks inherent in domestic investments. These risks are often
heightened for investments in developing markets, including certain
Eastern European countries. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in
foreign nations (including, for example, withholding taxes on interest
and dividends) or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country),
foreign investment controls on daily stock movements, default in foreign
government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less
publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to United States companies. Further, the
Fund may encounter difficulties or be unable to vote proxies,
exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts. Also, some countries may withhold portions
of interest and dividends at the source. These considerations generally
are more of a concern in developing countries, where the possibility of
political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries.
Investments in companies domiciled in developing countries therefore
may be subject to potentially higher risks than investments in developed
countries. Brokerage commissions, custodial services and other costs
relating to investment in foreign countries are generally more
expensive than in the United States.
Foreign securities markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result either in
losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell
the security, could result in possible liability to the purchaser.
In many foreign countries there is less government supervision and
regulation of business and industry practices, stock exchanges,
brokers and listed companies than in the United States. There is an
increased risk, therefore, of uninsured loss due to lost, stolen or
counterfeit stock certificates. In addition, the foreign securities
markets of any of the countries in which the Fund may invest may also be
smaller, less liquid, and subject to greater price volatility than
those in the United States. The Fund may invest in Eastern European
countries, which involves special risks that are described under "Investment
Objectives and Policies - Risk Factors" in the SAI.
Prior governmental approval of foreign investments may be required
under certain circumstances in some developing countries, and the extent of
foreign investment in domestic companies may be subject to limitation
in other developing countries.
Foreign ownership limitations also may be imposed by the charters
of individual companies in developing countries to prevent, among other
concerns violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by
foreign investors may require governmental registration and/or
approval in some developing countries. The Fund could be adversely
affected by delays in or a refusal to grant any required governmental
registration or approval for such repatriation.
Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been and
may continue to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade.
Illiquid Securities. Generally an "illiquid security" is any security
that cannot be disposed of promptly and in the ordinary course of
business at approximately the amount at which the Fund has valued the
instrument. Subject to this limitation, the Board of Trustees has
authorized each Fund to invest in restricted securities where such
investment is consistent with the Fund's investment objective and has
authorized such securities to be considered to be liquid to the extent the
Fund's Investment Manager determines that there is a liquid
institutional or other market for such securities for example, restricted
securities which may be freely transferred among qualified
institutional buyers pursuant to Rule 144A under the Securities Act of
1933, as amended, and for which a liquid institutional market has
developed. The Board of Trustees will review any determination by the
Fund's Investment Managers to treat a restricted security as liquid
on a regular basis, including the Investment Managers' assessment of
current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, the Funds' advisers and the Board of
Trustees will take into account the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer).
To the extent a Fund invests in restricted securities that are deemed
liquid, the general level of illiquidity in the applicable Fund may be
increased if qualified institutional buyers become uninterested in
purchasing these securities or the market for these securities contracts.
Structured Investments. Included among the issuers of debt securities
in which the Funds (except the Money Market Fund) may invest are
entities organized and operated solely for the purpose of restructuring the
investment characteristics of various securities. These entities are
typically organized by investment banking firms which receive fees in
connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with
or purchase by an entity, such as a corporation or trust, of specified
instruments and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or representing
interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued
Structured Investments to create securities with different investment
characteristics such as varying maturities, payment priorities or
interest rate provisions; the extent of the payments made with respect to
Structured Investments is dependent on the extent of the cash flow on the
underlying instruments. Because Structured Investments of the type in which
such Funds anticipate investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.
The Funds are permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of
another class. Subordinated Structured Investments typically have higher
yields and present greater risks than unsubordinated Structured
Investments. Although a Fund's purchase of subordinated Structured
Investments would have a similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of the limitations placed on the extent of a
Fund's assets that may be used for borrowing activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, a Fund's
investment in these Structured Investments may be limited by the
restrictions contained in the 1940 Act. Structured Investments are
typically sold in private placement transactions, and there currently is
not an active trading market for Structured Investments. To the extent
such investments are illiquid, they will be subject to a Fund's
restrictions on investments in illiquid securities.
Futures Contracts. The Bond, Asset Allocation, International,
Developing Markets, Mutual Discovery, Mutual Shares and Small Cap Funds
may purchase and sell financial futures contracts. Currently, futures
contracts are available on several types of fixed-income securities
including: U.S. treasury bonds, notes and bills, commercial paper, and
certificates of deposit.
As long as required by regulatory authorities, these Funds will limit
their use of futures contracts to hedging transactions in order to avoid
being a commodity pool. For example, they might use futures contracts
to hedge against anticipated changes in interest rates that might
adversely affect either the value of the Funds' securities or the price
of the securities which the Funds intend to purchase. The Funds' hedging
may include sales of futures contracts as an offset against the effect of
expected increases in interest rates and purchases of futures contracts
as an offset against the effect of expected declines in interest rates.
Although other techniques could be used to reduce the Funds' exposure to
interest rate fluctuations, they may be able to hedge their exposure
more effectively and perhaps at a lower cost by using futures contracts.
At the time a Fund purchases or sells a futures contract, it is required
to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or high quality debt securities ("initial
margin").The margin required for a futures contract is set by the exchange
or board of trade on which the contract is traded and may be modified
during the term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract which is
returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Funds expect to earn
interest income on initial margin deposits. A futures contract held by
a Fund is valued daily at the official settlement price of the exchange on
which it is traded. Each day the Funds pay or receive cash, called
"variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead
settlement between the Fund and the broker of the amount one would owe the
other if the futures contract expired. In computing daily net asset
value, a Fund will mark to market its open futures positions. In
addition, the Fund must deposit in a segregated account additional cash or
high quality debt securities to ensure the futures contracts are
unleveraged. The value of assets held in the segregated account must be
equal to the daily market value of all outstanding futures contracts less any
amounts deposited as margin.
Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual
obligation is accomplished by purchasing or selling an identical off
setting futures contract. Other financial futures contracts by their
terms call for cash settlements.
Foreign Currency Hedging Transactions. In order to hedge against
foreign currency exchange rate risks, the Bond, Asset Allocation, Developing
Markets, Mutual Discovery, Mutual Shares and Small Cap Funds may enter
into forward foreign currency exchange contracts, as well as purchase
put or call options on foreign currencies. In addition, for hedging
purposes only, the Bond, Asset Allocation, International, Developing
Markets, Mutual Discovery, Mutual Shares and Small Cap Funds may enter into
foreign currency futures contracts, as described below.
The Funds may also conduct their foreign currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market.
A Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and
their customers. A Fund may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when a Fund
believes that a foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency, or when
a Fund believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, it may enter into a forward contract to buy
that foreign currency for a fixed dollar amount. This second
investment practice is generally referred to as "cross-hedging." Because
in connection with a Fund's forward foreign currency transactions an amount
of the Fund's assets equal to the amount of the purchase will be held aside
or segregated to be used to pay for the commitment, a Fund will always have
cash, cash equivalents or high quality debt securities available
sufficient to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event, a Fund's ability
to utilize forward contracts in the manner set forth above may be
restricted. Forward contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in
poorer overall performance for a Fund than if it had not engaged in such
contracts.
The Bond, Asset Allocation, Developing Markets, Mutual Discovery, Mutual
Shares and Small Cap Funds may purchase and write put and call
options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be acquired.
As is the case with other kinds of options, however, the writing of an
option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and a Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuation in exchange rates,
although, in the event of rate movements adverse to a Fund's position,
the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or
purchased by a Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
The Bond, Asset Allocation, International, Developing Markets, Mutual
Discovery, Mutual Shares and Small Cap Funds may enter into
exchange-traded contracts for the purchase or sale for future delivery of
foreign currencies ("foreign currency futures"). This investment
technique will be used only to hedge against anticipated future changes
in exchange rates which otherwise might adversely affect the value of a
Fund's portfolio securities or adversely affect the prices of
securities that a Fund intends to purchase at a later date. The
successful use of foreign currency futures will usually depend on the
ability of a Fund's Investment Manager to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner,
a Fund may not achieve the anticipated benefits of foreign currency futures
or may realize losses.
Options on Securities or Indices. As indicated in the prospectus,
certain Funds may write covered call and put options and purchase
call and put options on securities or stock indices that are traded on
United States and foreign exchanges and in the over-the-counter markets.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified
security (in the case of a call option) or to sell a specified security (in
the case of a put option) from or to the writer of the option at a
designated price during the term of the option. An option on a securities
index gives the purchaser of the option, in return for the premium paid,
the right to receive from the seller cash equal to the difference between
the closing price of the index and the exercise price of the option.
A Fund may write a call or put option only if the option is "covered". A
call option on a security written by the Fund is "covered" if the Fund
owns the underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities
held in its portfolio. A call option on a security is also "covered" if
the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held
(1) is equal to or less than the exercise price of the call written or (2)
is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or high grade U.S.
Government Securities in a segregated account with its custodian. A put
option on a security written by the Fund is "covered" if the Fund
maintains cash or fixed income securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a
put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than
the exercise price of the put written.
Each Fund will cover call options on stock indices that it writes by
owning securities whose price changes, in the opinion of its Investment
Manager, are expected to be similar to those of the index, or in such
other manner as may be in accordance with the rules of the exchange on
which the option is traded and applicable laws and regulations.
Nevertheless, where a Fund covers a call option on a stock index through
ownership of securities, such securities may not match the composition of
the index. In that event, a Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of
the index. A Fund will cover put options on stock indices that it writes
by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which
the option is traded and applicable laws and regulations.
A Fund will receive a premium from writing a put or call option,
which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of a security or an
index on which the Fund has written a call option falls or remains the
same, the Fund will realize a profit in the form of the premium received
(less transaction costs) that could offset all or a portion of any
decline in the value of the portfolio securities being hedged. If the
value of the underlying security or index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the Fund's investments. By writing a put
option, the Fund assumes the risk of a decline in the underlying security
or index. To the extent that the price changes of the portfolio
securities being hedged correlate with changes in the value of the
underlying security or index, writing covered put options on indices or
securities will increase the Fund's losses in the event of a market
decline, although such losses will be offset in part by the premium
received for writing the option.
A Fund may also purchase put options to hedge its investments against
a decline in value. By purchasing a put option, the Fund will seek to
offset a decline in the value of the portfolio securities being
hedged through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option
does not increase, the Fund's loss will be limited to the premium paid
for the option plus related transaction costs. The success of this
strategy will depend, in part, on the correlation between the changes in
value of the underlying security or index and the changes in value of the
Fund's security holdings being hedged.
A Fund may purchase call options on individual securities to hedge against
an increase in the price of securities that the Fund anticipates
purchasing in the future. Similarly, the Fund may purchase call options
on a securities index to attempt to reduce the risk of missing a broad
market advance, or an advance in an industry or market segment, at a
time when the Fund holds uninvested cash or short-term debt securities
awaiting investment. When purchasing call options, the Fund will bear
the risk of losing all or a portion of the premium paid if the value of
the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of
wither buyers or sellers, or the options exchange could suspend trading
after the price has risen or fallen more than the maximum specified by the
exchange. Although the Fund may be able to offset to some extent any
adverse effects of being unable to liquidate an option position, the Fund
may experience losses in some cases as a result of such inability.
Short Sales. Certain Funds may make short sales of securities as indicated
in their respective prospectuses. A short sale is a transaction in which
the Fund sells a security it does not own in anticipation that the market
price of that security will decline. Each Fund expects to make short
sales as a form of hedging to offset potential declines in long
positions in similar securities, in order to maintain portfolio flexibility
and for profit.
When a Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon
conclusion of the sale. The Fund may have to pay a fee to borrow
particular securities and is often obligated to pay over any payments
received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured
by collateral deposited with the broker-dealer, usually cash, U.S.
government securities or other high grade liquid securities similar to
those borrowed. The Fund will also be required to deposit similar
collateral with its custodian to the extent, if any, necessary so
that the value of both collateral deposits in the aggregate is at all
times equal to at least 100% of the current value of the security sold short.
If the price of the security sold short increases between the time of
the short sale and the time the Fund replaces the borrowed security, the
Fund will incur a loss; conversely, if the price declines, the Fund will
realize a gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the Fund's gain is limited to
the price at which it sold the security short, its potential loss is
theoretically unlimited.
The Mutual Discovery and Mutual Series Funds may make short sales, but
will not make a short sale if, after giving effect to such sale, the market
value of all securities sold short exceeds 5% of the value of the
Fund's total assets or the Fund's aggregate short sales of a
particular class of securities exceeds 25% of the outstanding
securities of that class. These Funds may also make short sales "against
the box" without respect to such limitations. In this type of short sale,
at the time of the sale, the Funds own or have the immediate and
unconditional right to acquire at no additional cost the identical security.
Stock Index Futures Contracts. The Stock, Asset Allocation, Developing
Markets, International, Mutual Discovery, Mutual Shares and Small Cap Funds
may buy and sell index futures contracts with respect to any stock index,
and Templeton Bond Fund may buy and sell index futures contracts with
respect to any bond index trade done on a recognized stock exchange or board
of trade. The Funds may invest in index futures contracts for hedging
purposes only, and not for speculation. A Fund may engage in such
transactions only to an extent that the total contract value of the
futures contracts do not exceed 20% of the Fund's total assets at the
time when such contracts are entered into. Successful use of stock
index futures is subject to the ability of the Investment Managers to
predict correctly movements in the direction of the stock markets. No
assurance can be given that the Investment Managers' judgment in this
respect will be correct.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at a price agreed upon when the
contract is made. The value of a unit is the current value of the
stock index. For example, the Standard & Poor's Stock Index ("S&P 500
Index" or "Index") is composed of 500 selected common stocks, most of
which are listed on the New York Stock Exchange. The S&P 500 Index assigns
a relative weighing to the value of one share of each of these 500 common
stocks included in the Index, and the Index fluctuates with changes in the
market values of the shares of those common stocks. In the case of the S&P
500 Index, contracts are to buy or sell 500 units. Thus, if the value of
the S&P 500 Index were $150, one contract would be worth $75,000 (500
units x $150).The stock index futures contract specifies that no delivery
of the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the contract, with
the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For
example, if a Fund enters into a futures contract to buy 500 units of the
S&P 500 Index at a specified future date at a contract price of $150 and the
S&P 500 Index is at $154 on that future date, the Fund will gain $2,000
(500 units x gain of $4). If a Fund enters into a futures contract to
sell 500 units of the stock index at a specified future date at a contract
price of $150 and the S&P 500 Index is at $154 on the future date, the Fund
will lose $2,000 (500 units x loss of $4).
During or in anticipation of a period of market appreciation, a Fund
may enter into a "long hedge" of common stock which it proposes to add
to its portfolio by purchasing stock index futures for the purpose of
reducing the effective purchase price of such common stock. To the
extent that the securities which a Fund proposes to purchase change in
value in correlation with the stock index contracted for, the purchase
of futures contracts on that index would result in gains to the Fund
which could be offset against rising prices of such common stock.
During or in anticipation of a period of market decline, A Fund may
"hedge" common stock in its portfolio by selling stock index futures for
the purpose of limiting the exposure of its portfolio to such decline. To
the extent that a Fund's portfolio of securities changes in value in
correlation with a given stock index, the sale of futures contracts on that
index could substantially reduce the risk to the portfolio of a market
decline and, by so doing, provide an alternative to the liquidation
of securities positions in the portfolio with resultant transaction costs.
Reverse Repurchase Agreements. Certain Funds may enter into reverse
repurchase agreements with banks and broker-dealers. Reverse
repurchase agreements involve sales by a Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same
assets at a later date at a fixed price. During the reverse
repurchase agreement period, the Fund continues to receive dividend
payments on these securities.
When effecting reverse repurchase transactions, each Fund will establish
a segregated account with its custodian bank in which it will maintain
cash, U.S. Government securities or other liquid high grade debt
obligations equal in value to its obligations with respect to reverse
repurchase agreements. Reverse repurchase agreements involve the risk
that the market value of the securities retained by a Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes
insolvent, a Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee
or receiver, whether to enforce the Fund's obligation to repurchase
the securities. Reverse repurchase agreements are considered borrowings
by the Funds and as such are subject to the investment limitations discussed
under "Fundamental Investment Restrictions." These transactions may
increase the volatility of a Fund's income or net asset value. The Fund
carries the risk that any securities purchased with the proceeds of the
transaction will depreciate or not generate enough income to cover the
Fund's obligations under the reverse repurchase transaction. These
transactions also increase the interest and operating expenses of a fund.
RISK FACTORS
Each Fund, except the Money Market Fund, has the right to purchase
securities in any foreign country, developed or developing, if they are
listed on an exchange, as well as a limited right to purchase such
securities if they are unlisted. The Growth, Mutual Shares and Small Cap
Funds' investments in foreign securities are not currently expected to
exceed 15% of its assets. Investors should consider carefully the risks
involved in securities of companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic
investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in
the United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable
to United States companies. Foreign markets have substantially less
volume than the New York Stock Exchange ("NYSE"), and securities of some
foreign companies are less liquid and more volatile than securities
of comparable
United States companies. A Fund, therefore, may encounter difficulty in
obtaining market quotations for purposes of valuing its portfolio and
calculating its net asset value. Although the Funds (except the Money
Market Fund) may invest up to 15% of their total assets in unlisted
securities or securities with a limited trading market, in the opinion
of management such securities do not present a significant liquidity
problem.
Commission rates in foreign countries, which are generally fixed rather
than subject to negotiation as in the United States, are likely to be
higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers and listed companies than in the
United States.
Investments in companies domiciled in developing countries may be subject
to potentially higher risks than investments in developed countries. These
risks include (i) less social, political and economic stability; (ii)
the small current size of the markets for such securities and the
currently low or nonexistent volume of trading, which result in a lack
of liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Funds' investment opportunities, including
restrictions on investment in issuers or industries deemed sensitive to
national interests; (iv) foreign taxation; (v) the absence of
developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the
absence, until recently in certain Eastern European countries, of a
capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in Eastern Europe
may be slowed or reversed by unanticipated political or social events in
such countries.
In addition, many countries in which the Funds may invest have
experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies
and securities markets of certain countries. Moreover, the economies of
some developing countries may differ favorably or unfavorably from the
United States economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without
adequate compensation, and there can be no assurance that such
expropriation will not occur in the future. In the event of such
expropriation, the Funds could lose a substantial portion of any
investments they have made in the affected countries.
Further, no accounting standards exist in Eastern European countries.
Finally, even though certain Eastern European currencies may be
convertible into U.S. dollars, the conversion rates may be artificial to
the actual market values and may be adverse to the Funds' Shareholders.
Certain Eastern European countries, which do not have market economies,
are characterized by an absence of developed legal structures governing
private and foreign investments and private property. Certain
countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment of foreign persons in a
particular company, or limit the investment of foreign persons to only a
specific class of securities of a company that may have less
advantageous terms than securities of the company available for purchase by
nationals.
Authoritarian governments in certain Eastern European countries may
require that a governmental or quasi-governmental authority act as
custodian of a Fund's assets invested in such country. To the extent such
governmental or quasi-governmental authorities do not satisfy the
requirements of the 1940 Act to act as foreign custodians of a Fund's cash
and securities, the Fund's investment in such countries may be limited or
may be required to be effected through intermediaries. The risk of loss
through governmental confiscation may be increased in such countries.
Investing in Russian companies involves a high degree of risk and
special considerations not typically associated with investing in the
United States securities markets, and should be considered highly
speculative. Such risks include: (1) delays in settling portfolio
transactions and risk of loss arising out of Russia's system of share
registration and custody; (2) the risk that it may be impossible or more
difficult than in other countries to obtain and/or enforce a judgment;
(3) pervasiveness of corruption and crime in the Russian economic system;
(4) currency exchange rate volatility and the lack of available currency
hedging instruments; (5) higher rates of inflation, including the risk
of social unrest associated with periods of hyper-inflation; (6)
controls on foreign investment and local practices disfavoring foreign
investors and limitations on repatriation of invested capital, profits
and dividends, and on a Fund's ability to exchange local currencies for
U.S. dollars; (7) the risk that the government of Russia or other
executive or legislative bodies may decide not to continue to support the
economic reform program simple minded since the dissolution of the Soviet
Union and could follow radically different political and/or economic
policies to the detriment of investors, including non-market-oriented
policies such as the support of certain industries at the expense of
other sectors or investors, or a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national
scale; (9) dependency on exports and the corresponding importance of
international trade; (10) the risk that the Russian tax system will not
be reformed to prevent inconsistent, retroactive and/or exorbitant
taxation; and (11) possible difficulty in identifying a purchaser of
securities held by a Fund due to the underdeveloped nature of the
securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities
transactions in Russia are privately negotiated outside of stock
exchanges. Because of the recent formation of the securities markets as
well as the underdeveloped state of the banking and telecommunications
systems, settlement, clearing and registration of securities transactions
are subject to significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of the 1940 Act)
as defined according to entries in the company's share register and
normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for
shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not
necessarily subject to effective state supervision and it is possible for a
Fund to lose its registration through fraud, negligence or even mere
oversight. While each Fund will endeavor to ensure that its
interest continues to be appropriately recorded either itself or through a
custodian or other agent inspecting the share register and by obtaining
extracts of share registers through regular confirmations, these extracts
have no legal enforceability and it is possible that subsequent legal
amendment or other fraudulent act may deprive a Fund of its ownership
rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce
any rights it may have against the registrar or issuer of the
securities in the event of loss of share registration. Furthermore,
although a Russian public enterprise with more than 1,000 shareholders is
required by law to contract out the maintenance of its shareholder register
to an independent entity that meets certain criteria, in practice this
regulation has not always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by
illegally instructing the registrar to refuse to record transactions in
the share register. This practice may prevent a Fund from investing in
the securities of certain Russian companies deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by a Fund if a potential purchaser is
deemed unsuitable, which may expose the Fund to potential loss on the
investment.
The Funds endeavor to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover
service charges) may be incurred, particularly when a Fund changes
investment from one country to another or when proceeds of the sale of
Shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would
prevent a Fund from transferring cash out of the country or withhold
portions of interest and dividends at the source, or impose other taxes
with respect to a Fund's investments in securities of issuers of
that country.
There is the possibility of expropriation, nationalization or
confiscatory taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country),
default in foreign government securities, political or social instability,
or diplomatic developments which could affect investments in securities of
issuers in those nations.
Each Fund may be affected either unfavorably or favorably by fluctuations
in the relative rates of exchange between the currencies of different
nations, by exchange control regulations and by indigenous economic and
political developments. Some countries in which a Fund may invest may also
have fixed or managed currencies that are free floating against the
U.S. dollar. Further, certain currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which a Fund's securities are denominated may have a
detrimental impact on the Fund. Through each Fund's flexible policy,
the Investment managers endeavor to avoid unfavorable consequences and
to take advantage of favorable developments in particular nations where
from time to time it places a Fund's investments. The exercise of this
flexible policy may include decisions to purchase securities with
substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of
security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits,
if any, will exceed losses.
The Trustees consider at least annually the likelihood of the imposition
by any foreign government of exchange control restrictions which would
affect the liquidity of the Funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts
of foreign governments to which such assets may be exposed. The Trustees
also consider the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories (see
"Investment Management and Other Services--Custodian"). However, in the
absence of willful misfeasance, bad faith or gross negligence on the part
of the Investment Managers, or reckless disregard of the obligations
and duties under the Investment Management Agreements, any losses
resulting from the holding of a Fund's portfolio securities in foreign
countries and/or with securities depositories will be at the risk of the
Shareholders. No assurance can be given that the Trustees' appraisal of
the risks will always be correct or that such exchange control restrictions
or political acts of foreign governments might not occur.
There are several risks associated with the use of futures contracts
and stock index futures contracts as hedging techniques. A purchase or sale
of a futures contract may result in losses in excess of the amount invested.
There can be significant differences between the securities and futures
markets that could result in an imperfect correlation between the markets,
causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures, including technical influences in
futures trading, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available
for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when, and how
to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The
daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement
price at the end of the current trading session. Once the daily limit has
been reached in a futures contract subject to the limit, no more trades
may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and,
therefore, does not limit potential losses because the limit may work
to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures
contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when
a Fund seeks to close out a futures position, and it would remain obligated
to meet margin requirements until the position is closed. The Funds which
are authorized to engage in futures transactions intend to purchase or
sell futures only on exchanges or boards of trade where there appears to
be an active secondary market, but there is no assurance that a liquid
secondary market will exist for any particular contract or at any
particular time. In addition, many of the futures contracts available
may be relatively new instruments without a significant trading history.
As a result, there can be no assurance that an active secondary market
will develop or continue to exist.
Use of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the stock index
futures on the one hand and movements in the prices of the securities being
hedged or of the underlying stock index on the other. Successful use
of stock index futures by a Fund for hedging purposes also depends
upon the Investment Manager's ability to predict correctly movements in
the direction of the market, as to which no assurance can be given.
The Funds may enter into a contract for the purchase or sale of a security
denominated in a foreign currency and may enter into a forward foreign currency
contract ("forward contract") in order to "lock in" the U.S. dollar price of the
security. In addition, when an Investment Manager believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the amount
of the former foreign currency, approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The projection
of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it
may be necessary for the Funds to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency a Fund is
obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the
sale of the portfolio security if its market value exceeds the amount of
foreign currency a Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss to the
extent that there has been movement in forward contract prices. If a
Fund engages in an offsetting transaction, it may subsequently enter into
a new forward contract to sell the foreign currency. Should forward prices
decline during the period between a Fund entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, a Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
INVESTMENT RESTRICTIONS
The Funds have imposed upon themselves certain investment restrictions
which, together with their investment objectives, are fundamental policies
except as otherwise indicated. No changes in a Fund's investment
objectives, policies or investment restrictions (except those which are not
fundamental policies) can be made without the approval of the Shareholders
of that Fund. For this purpose, the provisions of the 1940 Act require the
affirmative vote of the lesser of either (a) 67% or more of the
Fund's Shares present at a Shareholders' meeting at which the holders
of more than 50% of the outstanding Shares are present or represented
by proxy or (b) more than 50% of the outstanding Shares of the Fund.
In accordance with these restrictions, a Fund will not:
1. Invest in real estate or mortgages on real estate, or purchase or
sell commodity contracts, except that (i) the Bond, Asset Allocation,
Developing Markets, Growth, Mutual Discovery, Mutual Shares and Small
Cap Funds may invest in marketable securities secured by real estate or
interests therein, such as CMOs, or issued by companies or investment
trusts which invest in real estate or interests therein; and (ii) the
Bond, Asset Allocation, Developing Markets, International, Growth,
Mutual Discovery, Mutual Shares and Small Cap Funds may purchase and sell
foreign currency futures and financial futures; and (iii) the Stock,
Asset Allocation, Developing Markets, International, Growth, Mutual
Discovery, Mutual Shares and Small Cap Funds may purchase and sell stock
index futures contracts; and (iv) Templeton Bond Fund may purchase and
sell bond index futures contracts.
2. With respect to 75% of its total assets, invest more than 5% of the
total value of its assets in the securities of any one issuer, or
purchase more than 10% of any class of securities of any one company,
including more than 10% of its outstanding voting securities (except
for investments in obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities).
3. Act as an underwriter, or issue senior securities except as set forth in
Investment Restriction 5 below.
4. Lend money, except that all Funds may purchase publicly distributed
bonds, debentures, notes and other evidences of indebtedness and may buy
from a bank or broker-dealer U.S. Government obligations with a simultaneous
agreement by the seller to repurchase them at the original purchase
price plus accrued interest, and may lend their portfolio securities.
5. Borrow money for any purpose other than redeeming its Shares or
purchasing its Shares for cancellation, and then only as a temporary
measure up to an amount not exceeding 5% of the value of its total
assets, except that Templeton Bond, Stock, Asset Allocation, and
International Funds may borrow money in amounts up to 30% of the value of
its net assets. The Developing Markets, Growth, Mutual Discovery,
Mutual Shares and Small Cap Funds may borrow money from banks in an amount up
to 33 1/3% of the Fund's total assets (including the amount borrowed),
but may not pledge, mortgage or hypothecate its assets for any purpose,
except to secure borrowings and then only to an extent not greater than 15%
of the Fund's total assets. Arrangements with respect to margin for futures
contracts, forward contracts and related options are not deemed to be
pledge of assets.
6. Invest more than 25% of its total assets in a single industry, except
that this limitation will not apply to investments in securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or repurchase agreements on such securities, and
Templeton Money Market Fund may invest in obligations issued by domestic
banks (including certificates of deposit, repurchase agreements, and
bankers' acceptances) without regard to this limitation.
As non-fundamental investment policies, which may be changed by the Board
of Trustees without Shareholder approval, a Fund will not invest more than
15% of its total assets in securities of foreign issuers which are not
listed on a recognized United States or foreign securities exchange, or
more than 15% of its total assets in (a) securities with a limited
trading market, (b) securities subject to legal or contractual
restrictions as to resale, and (c) repurchase agreements not terminable
within seven days.
As a non-fundamental policy, the Growth, Small Cap, Mutual Discovery and
Mutual Shares Funds will not purchase or retain securities of any company in
which Trustees or officers of the Trust or of a Fund's Investment
Manager, individually owning more than 1/2 of 1% of these securities
of such company, in the aggregate own more than 5% of the securities of
such company.
The Franklin Growth Investments Fund will not, as a non-fundamental
policy, (i) invest for purposes of control of an issuer, (ii) invest more
than 5% in unseasoned issuers, (iii) use margin accounts or (iv) invest more
than 10% of its assets in illiquid securities.
The Franklin Small Cap Investments Fund will not, as a non-fundamental
policy, (i) invest for purposes of control of an issuer, (ii) effect short
sales or (iii) invest more than 10% of its assets in illiquid securities.
Whenever any investment policy or investment restriction states a
maximum percentage of a Fund's assets which may be invested in any security
or other property, it is intended that such maximum percentage
limitation be determined immediately after and as a result of the Fund's
acquisition of such security or property. The investment restrictions do
not preclude a Fund from purchasing the securities of any issuer
pursuant to the exercise of subscription rights distributed to a Fund by the
issuer, unless such purchase would result in a violation of investment
restriction number 6, or the non-fundamental investment policies
discussed above.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the
Fund, including general supervision and review of its investment
activities. The Board, in turn, elects the officers of the Fund who
are responsible for administering the Fund's day-to-day operations.
The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below. Members of the Board
who are considered "interested persons" of the Fund under the 1940 Act are
indicated by an asterisk ("*").
Harris J. Ashton (65)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the
Franklin Templeton Group of Funds.
*Nicholas F. Brady (68)
The Bullitt House
102 East Dover Street
Easton, Maryland
Trustee
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. And Darby
Emerging markets Investments LDC (investment firms) (1994-present); Chairman
and Director, Templeton Central and Eastern European Investment Company;
Director, Templeton Global Strategy Funds, Amerada Hess Corporation,
Christiana Companies, and the H.J. Heinz Company; formerly, Secretary of the
United States Department of Treasury (1988-1993) and Chairman of the Board,
Dillon, Read & Co., Inc. (investment banking) prior to 1988; and director or
trustee as the case may be, of 23 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General
Host Corporation (nursery and craft centers); and director or trustee, as
the case may be, of 54 of the investment companies in the Franklin Templeton
Group of Funds.
Andrew H. Hines, Jr. (75)
150 2nd Avenue N.
St. Petersburg, FL 33701
Trustee
Consultant for the Triangle Consulting; Executive-in-Residence of Eckerd
College (1991-present); formerly, Chairman of the Board and Chief Executive
Officer of Florida Progress Corporation (1982-1990) and director of various
of its subsidiaries; and director or trustee, as the case may be, of 24 of
the investment companies in the Franklin Templeton Group of Funds.
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present; formerly, chairman (1995-1997) and trustee
(1993-1997) of National Child Research Center; assistant to the President of
the United States and Secretary of the Cabinet (1990-1993), general counsel
to the United States Treasury Department (1989-1990) and counselor to the
Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989); and trustee or
director of 24 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton Services, Inc. and General Host
Corporation (nursery and craft centers); and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the investment companies in the Franklin
Templeton Group of Funds.
Betty P. Krahmer (68)
2201 Kentmere Parkway
Wilmington, Delaware
Trustee
Director or Trustee of various civic associations; formerly, Economic
Analyst, U.S. government; and director or trustee, as the case may be, of 23
of the investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Fred R. Millsaps (69)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Trustee
Manager of personal investments (1978-present); director of various business
and nonprofit organizations; formerly, Chairman and Chief Executive Officer
of Landmark Banking Corporation (1969-1978), Financial Vice President of
Florida Power and Light (1965-1969) and Vice President of the Federal Reserve
Bank of Atlanta (1958-1965); and director or trustee, as the case may be, of
24 of the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief
Investment Officer and Director, Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 56 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Samuel J. Forester, Jr. (49)
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice President of 10 of the investment companies in the Franklin Templeton
Group of Funds; formerly, President, Templeton Global Bond Managers, a
division of Templeton Investment Counsel, Inc.; founder and partner of
Forester, Hairston Investment Management (1989-1990), Managing Director
(Mid-East Region), Merrill Lynch, Pierce, Fenner & Smith Inc. (1987-1988) and
Advisor for Saudi Arabian Monetary Agency (1982-1987).
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Mark G. Holowesko (38)
Lyford Cay
Nassau, Bahamas
Vice President
President and Chief Investment Officer, Templeton Global Advisors Limited;
Executive Vice President and Director, Templeton Worldwide, Inc.; formerly,
Investment Administrator with RoyWest Trust Corporation (Bahamas) Limited
(1984-1985); and officer of 23 of the investment companies in the Franklin
Templeton Group of Funds.
Rupert H. Johnson, Jr. (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
56 of the investment companies in the Franklin Templeton Group of Funds.
John R. Kay (57)
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice President and Treasurer, Templeton Worldwide, Inc.; Assistant Vice
President, Franklin Templeton Distributors, Inc.; formerly, Vice President
and Controller, Keystone Group, Inc.; and officer of 27 of the investment
companies in the Franklin Templeton Group of Funds.
Elizabeth M. Knoblock (43)
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President, Compliance
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.;
formerly, Vice President and Associate General Counsel, Kidder Peabody & Co.
Inc. (1989-1990), Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson and Lehman Hutton Inc.
(1986-1988), and Special Counsel of the Division of Investment Management of
the U.S. Securities and Exchange Commission (1984-1986); and officer of 23 of
the investment companies in the Franklin Templeton Group of Funds.
Thomas Latta (37)
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice President, Templeton Global Bond Managers, a division of Templeton
Investment Counsel, Inc., formerly, Portfolio Manager at Forester & Hairston
(1988-1990) and investment advisor at Merrill Lynch Capital Markets
(1981-1988).
Barbara J. Green (50)
500 East Broward Blvd.
Fort Lauderdale, Florida
Secretary
Senior Vice President, Templeton Worldwide, Inc.; Senior Vice President,
Templeton Global Investors, Inc.; formerly, Deputy Director of the Division
of Investment Management, Executive Assistant and Senior Advisor to the
Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow,
U.S. Securities and Exchange Commission (1986-1995), Attorney, Roger & Wells,
and Judicial Clerk, U.S. District Court (District of Massachusetts); and
officer of 23 of the investment companies in the Franklin Templeton Group of
Funds.
James R. Baio (43)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Treasurer
Certified Public Accountant; Treasurer, Franklin Mutual Advisers, Inc.;
Senior Vice President, Templeton Worldwide, Inc., Templeton Global Investors,
Inc. and Templeton Funds Trust Company; formerly, Senior Tax Manager for
Ernst & Young (certified public accountants) (1977-1989); and officer of 24
of the investment companies in the Franklin Templeton Group of Funds.
The preceding table also shows the Officers and Trustees who are
affiliated with the Trust's Principal Underwriter and Investment Managers.
*These are Trustees who are "interested persons" of the Trust as that term
is defined in the 1940 Act. Charles B. Johnson is an interested person
due to his ownership interest in Franklin Resources, Inc. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby overseas Partners,
L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in February
, 1994, and is Chairman and a shareholder of the corporate general
partner of Darby Overseas. In addition, Darby Overseas and Templeton
Global Advisors Limited are limited partners of Darby Emerging Markets
Fund, L.P. The remaining Trustees are not interested persons ("Independent
Trustees").
Nonaffiliated trustees and Mr. Brady are paid an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based
on the level of assets in each fund. Accordingly, the Trust currently pays
the independent Trustees and Mr. Brady an annual retainer of $6000.00
and a fee of $500.00 per meeting attended of the Board and its Committees.
As shown above, some of the nonaffiliated Trustees also serve as
directors, trustees or managing general partners of other investment
companies in the Franklin Templeton Group of Funds.
The following table shows the total fees paid to the nonaffiliated
Trustees by the Trust and by all investment companies in the Franklin
Templeton Group of Funds:
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES THE FRANKLIN TEMPLETON GROUP OF
RECEIVED FROM TEMPLETON GROUP FUNDS ON WHICH
NAME THE FUND* OF FUNDS* EACH SERVES**
- ---- --------- --------- -------------
Harris J. Ashton $8,000 $344,642 52
Nicholas F. Brady 8,000 119,675 23
S. Joseph Fortunato 8,000 361,562 54
Andrew H. Hines, Jr. 9,984 144,175 24
Edith E. Holiday 8,000 72,875 24
Betty P. Krahmer 8,000 119,675 23
Gordon S. Macklin 8,000 337,292 51
Fred R. Millsaps 8,354 144,175 24
*For the fiscal year ended December 31, 1997.
**We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does
not include the total number of series or funds within each investment
company for which the Board members are responsible. The Franklin Templeton
Group of Funds currently includes 57 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board and Mr. Brady are reimbursed for
expenses incurred in connection with attending board meetings, and paid
pro rata by each fund in the Franklin Templeton Group of Funds for which
they serve as director, trustee or managing general partner. No officer
or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in
the Franklin Templeton Group of Funds. Certain officers or Board members
who are shareholders of Resources may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to
its subsidiaries.
As of April 1, 1998, the officers and Trustees owned [# shares] of the
Trust. Many of the Board members own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr.
are brothers and the father and uncle, respectively, of Charles E. Johnson.
Principal Shareholders. Shares of the Fund are sold to and owned only
by insurance company separate accounts to serve as the investment vehicle
for variable annuity and life insurance contracts.
[The following information will be supplied in a B amendment]
As of April 1, 1998, there were [ ] Shares of Templeton Money Market
Fund outstanding; [ ] Shares of Templeton Bond Fund outstanding; [ ]
Shares of Templeton Stock Fund outstanding; [ ] Shares of Templeton
Asset Allocation Fund outstanding; [ ] Shares of Templeton
International Fund outstanding; [ ] Shares of Templeton Developing
Markets Fund outstanding. As of April 1, 1998, Phoenix Home Mutual Life
Insurance Company ("Phoenix Home Life") owned [ ]% of the outstanding
Shares of [ ] Fund. As of April 1, 1998, The Travelers Insurance Company
("The Travelers") owned [ ]% of the outstanding Shares of [ ] Fund. As
of April 1, 1998, the Variable Annuity Life Insurance Company ("VALIC")
owned [ ]% of the outstanding Shares of [ ] Fund. As of April 1, 1998,
IDS/American Express ("IDS/AMEX"), a Minnesota Corporation, on behalf of
the Flexible Portfolio Annuity, owned [ ]% of the outstanding Shares of
the [ ]Fund. However, [Phoenix Home Life, The Travelers, VALIC and
IDS/AMEX will exercise voting rights attributable to these Shares in
accordance with voting instructions received by owners of the contracts
issued by Phoenix Home Life, The Travelers, VALIC and IDS/AMEX. To this
extent, Phoenix Home Life, The Travelers VALIC, and IDS/AMEX ] do not
exercise control over the Trust by virtue of the voting rights from
their ownership of Trust Shares. To the knowledge of management, as of
April 1, 1998, [no other person owned of record or beneficially 5% or more of
the Shares of any of the Funds.]
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Managers and Services Provided. The Investment Manager of
Templeton Money Market Fund and Templeton Bond Fund is the Templeton
Global Bond Managers division ("TGBM") of Templeton Investment
Counsel, Inc. ("TICI"), a Florida corporation with offices in Fort
Lauderdale, Florida. The Investment Manager of Templeton Asset Allocation
Fund, Templeton Stock Fund, and Templeton International Fund is TICI. The
Investment Manager of Templeton Developing Markets Fund is Templeton
Asset Management Ltd. ("Templeton Singapore"). The Investment Manager of
Franklin Growth Investments Fund and Franklin Small Cap Investments Fund is
Franklin Advisers, Inc. ("Advisers"). The Investment Manager of
Mutual Discovery Investments Fund and Mutual Shares Investments Fund is
Franklin Mutual Advisers, Inc. ("Mutual Advisers"). The Investment
Managers are indirect wholly owned subsidiaries of Franklin Resources, Inc.
("Resources"), a publicly traded company whose shares are listed on the NYSE.
The Investment Managers provide investment research and portfolio
management services, including the selection of securities for the Funds to
buy, hold or sell, and the selection of brokers through whom the
Fund's portfolio transactions are executed. Their activities are
subject to the review and supervision of the Board to whom they render
periodic reports of the Funds' investment activities. The Investment
Managers are covered by fidelity insurance on their officers, directors
and employees for the protection of the Funds.
The Investment Managers also provide management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Managers may give
advice and take action with respect to any of the other funds and accounts
they manage, or for their own accounts, which may differ from the
action taken by an Investment Manager on behalf of a Fund. Similarly, with
respect to a Fund, an Investment Manager is not obligated to recommend,
purchase or sell, or to refrain from recommending, purchasing or
selling any security that the Investment Manager and access persons,
as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund or accounts.
Furthermore, the Investment Managers are not obligated to refrain from
investing in securities held by a Fund or other funds which they manage or
administer. Any transactions for the accounts of the investment Managers
and other access persons will be made in compliance with the Trust's Code
of Ethics as described in the section "Brokerage Allocation--Summary of
Code of Ethics." The Investment Management Agreements will continue in
effect through February 1998 and from year to year thereafter subject to
approval annually by the Board of Trustees or by vote of a majority of the
outstanding Shares of each Fund (as defined in the 1940 Act) and also, in
either event, the approval of a majority of those Trustees who are not
parties to the Management Agreements or interested persons of any such
party in person at a meeting called for the purpose of voting on such
approval.
Management Fees. For its services, Templeton Money Market Fund pays
its Investment Manager a monthly fee equal on an annual basis to 0.35%
of its average daily net assets up to $200 million, reduced to 0.30% of
such net assets from $200 million up to $1.3 billion and further reduced
to 0.25% of such net assets in excess of $1.3 billion. Templeton Bond
Fund pays its Investment Manager a monthly fee equal on an annual basis
to 0.50% of its average daily net assets up to $200 million, reduced to
0.45% of such net assets from $200 million up to $1.3 billion and further
reduced to 0.40% of such net assets in excess of $1.3 billion.
Templeton Asset Allocation Fund pays its Investment Manager a monthly
fee equal on an annual basis to 0.65% of its average daily net assets up to
$200 million, reduced to 0.585% of such net assets from $200 million up
to $1.3 billion and further reduced to 0.52% of such net assets in
excess of $1.3 billion.
Templeton Stock and International Funds pay their Investment Manager
a monthly fee equal on an annual basis to 0.75% of its average daily net
assets up to $200 million, reduced to 0.675% of such net assets from $200
million up to $1.3 billion and further reduced to 0.60% of such net assets
in excess of $1.3 billion.
Templeton Developing Markets Fund pays its Investment Manager a monthly
fee equal on an annual basis to 1.25% of its average daily net assets.
The Franklin Growth Investments Fund is obligated to pay Advisers a
monthly fee, based upon the Fund's average daily net assets, computed at
the annual rate of 0.60% of average daily net assets on the first $200
million of average daily net assets; 0.50% of such assets in excess of $200
million up to $1.2 billion; and 0.40% of such assets in excess of $1.2
billion.
The Franklin Small Cap Investments Fund is obligated to pay Advisers a
monthly fee, based on the Fund's average daily net assets, computed at the
annual rate of 0.75% of average daily net assets on the first $200 million
of average daily net assets; 0.65% of such assets in excess of $200 million
up to $1.2 billion of average daily net assets; and 0.55% of such assets in
excess of $1.2 billion.
The Mutual Discovery Fund and Mutual Shares Fund are obligated to
pay Franklin Mutual a monthly fee, based upon each Fund's average
daily net assets, computed at the annual rate of .80 and .60, of 1%,
respectively of average daily net assets.
The Investment Managers may determine in advance to limit the management
fees or to assume responsibility for the payment of certain operating
expenses relating to the operation of any Fund, which may have the
effect of decreasing the total expenses and increasing the total return
of such Fund. Any such action is voluntary and may be terminated by the
Investment Managers at any time unless otherwise indicated.
For the fiscal year ended December 31, 1997, management fees for
the Developing Markets Fund, before any advance waiver, totaled $[ ].
Under an agreement by the Investment Manager to limit its fees, the
Fund paid management fees totaling $[ ].
During the fiscal years ended December 31, 1997, 1996 and 1995, the
Funds paid the following investment management fees:
[to be supplied in later B Amendment]
Fund Administrator. Templeton Funds Annuity Company ("TFAC") performs
certain administrative functions as Fund Administrator for the Trust.
These include preparing and maintaining books, records and tax and
financial reports, and monitoring compliance with regulatory
requirements. TFAC is a wholly owned and subsidiary of Resources.
For its services, the Fund Administrator receives a monthly fee equal on
an annual basis to 0.15% of the combined average daily net assets of the
Trust (all Funds), reduced to 0.135% of the Trust's aggregate net
assets in excess of $200 million, further reduced to 0.10% annually of
such net assets in excess of $700 million and further reduced to 0.075%
annually of such net assets in excess of $1.2 billion. The fee is
allocated among the Funds according to their respective average daily
net assets. During the fiscal years ended December 31, 1997, 1996, and
1995, the Fund Administrator received fees of $[ ], $1,801,632,
$1,380,760 respectively.
Custodian. The Chase Manhattan Bank, N.A. serves as Custodian of the
Trust's assets, which are maintained at the Custodian's principal office,
MetroTech Center, Brooklyn, New York, New York 11245 and at the offices of
its branches and agencies throughout the world. The Custodian has entered
into agreements with foreign sub-custodians approved by the Trustees
pursuant to Rule 17f-5 under the 1940 Act. The Bank of New York,
Mutual Funds Division, 90 Washington Street, New York, New York
10286, acts as custodian of the securities and other assets of the
Franklin Growth Investments and Franklin Small Cap Investments Funds. The
State Street Bank and Trust Company, Atlantic Division, 225 Franklin
Street, Boston, MA 02110 acts as custodian for the Mutual Discovery and
Mutual Shares Investments Funds. The Custodians, their branches and
sub-custodians, generally domestically and frequently abroad, do not
actually hold certificates for the securities in their custody, but
instead have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents
of the issuers of the securities. Compensation for the services of the
Custodian is based on a schedule of charges agreed on from time to time.
The Custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Legal Counsel. Dechert Price & Rhoads, 1500 K Street, N.W., Washington,
D.C. 20005, is legal counsel for the Trust.
Independent Accountants. McGladrey & Pullen, LLP, 555 Fifth Avenue, New
York, New York 10017, serves as independent accountants for the Trust.
Its audit services comprise examination of the Trust's financial statements
and review of the Trust's filings with the Securities and Exchange Commission
("SEC").
Reports to Shareholders. The Trust's fiscal year ends on December 31.
Shareholders are provided at least semiannually with reports showing
the Funds' portfolios and other information, including an annual report
with financial statements audited by independent accountants.
Shareholders who would like to receive an interim quarterly report
may phone the Fund Information Department at 1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Investment Managers select brokers and dealers to execute the
Funds' portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, the Investment Managers seek to
obtain prompt execution of orders at the most favorable net price. For
portfolio transactions on a securities exchange, the amount of
commission paid by a Fund is negotiated between the Investment Managers
and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are
based to a large degree on the professional opinions of the persons
responsible for placement and review of the transactions. These opinions
are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The
Investment Managers will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of the Investment
Managers, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid and ask price.
The Investment Managers may pay certain brokers commissions that are
higher than those another broker may charge, if the Investment Mangers
determine in good faith that the amount paid is reasonable in relation to
the value of the brokerage and research services it receives. This may be
viewed in terms of either the particular transaction or the Investment
Managers' overall responsibilities to client accounts over which they
exercise investment discretion. The services that brokers may provide to
the Investment Managers include, among others, supplying information
about particular companies, markets, countries, or local, regional,
national or transnational economies, statistical data, quotations and other
securities pricing information, and other information that provides
lawful and appropriate assistance to the Investment Managers in carrying
out their investment advisory responsibilities. These services may not
always directly benefit a Fund. They must, however, be of value to the
Investment Managers in carrying out their overall responsibilities to their
clients.
Since most purchases by certain of the Portfolios are principal transactions
at net prices, these Portfolios incur little or no brokerage costs. The
Portfolios deal directly with the selling or buying principal or market maker
without incurring charges for the services of a broker on their behalf,
unless it is determined that a better price or execution may be obtained by
using the services of a broker. Purchase of portfolio securities from
underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers will include a spread between the
bid and ask prices. The Portfolios seek to obtain prompt execution of orders
at the most favorable net price. Transaction may be directed to dealers in
return for research and statistical information, as well as for special
services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or
on the research services the Investment Managers receive from dealers
effecting transactions in portfolio securities. The allocation of
transactions in order to obtain additional research services permits the
Investment Managers to supplement their own research and analysis
activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the Investment Managers and their affiliates may
use this research and data in their investment advisory capacities
with other clients. If a Fund's officers are satisfied that the best
execution is obtained, the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Because Distributors is a member of the NASD, it may sometimes
receive certain fees when the Fund tenders portfolio securities
pursuant to a tender-offer solicitation. As a means of recapturing
brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to the
Investment Managers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
with the tender.
If purchases or sales of securities of a Fund and one or more
other investment companies or clients supervised by the Investment
Managers are considered at or about the same time, transactions in these
securities will be allocated among the several investment companies and
clients in a manner deemed equitable to all by the Investment Managers,
taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as
a Fund is concerned. In other cases it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to a Fund.
During the fiscal years ended December 31, 1997, 1996 and 1995, the
Trust paid brokerage commissions totaling $[ ], $2,594,403, and
$1,525,000, respectively.
As of December 31, 1997, no Fund owned any securities issued by its
regular broker-dealers.
Portfolio Turnover. For reporting purposes, each Fund's portfolio
turnover rate is calculated by dividing the value of the lesser of
purchases or sales of portfolio securities for the fiscal year by the
monthly average of the value of the portfolio securities owned by the
Fund during the fiscal year. In determining such portfolio turnover,
short-term U.S. Government securities and all other securities whose
maturities at the time of acquisition were one year or less are excluded. A
100% portfolio turnover rate would occur, for example, if all of the
securities in the portfolio (other than short-term securities) were
replaced once during the fiscal year. The portfolio turnover rate for each
of the Funds will vary from year to year, depending on market conditions.
It is anticipated that the rate of portfolio turnover as defined above
for Templeton Stock, Asset Allocation, International and Developing Markets
Funds will be less than 50%, and for Templeton Bond Fund, Mutual
Discovery Investments Fund, Mutual Shares Investments Fund, Franklin
Small Cap Investments and the Franklin Growth Investments Fund less than
100%, under normal market conditions. Portfolio turnover could be
greater in periods of unusual market movement and volatility.
Templeton Bond Fund's portfolio turnover rates for the fiscal years
ended December 31, 1997 and 1996 were [ ] and 141.19%, respectively. These
rates exceed the anticipated portfolio turnover rate for Templeton Bond
Fund as a result of changing interest rates and currency exposure
considerations.
Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations must be
sent to a compliance officer; (iii) all brokerage accounts must be disclosed
on an annual basis; and, (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a portfolio or other client.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which a Fund's Shares may be
purchased and redeemed. See "How to Buy Shares of the Funds" and "How to
Sell Shares of the Funds." Net asset value per Share is calculated
separately for each Fund. Net asset value per Share is determined as of
the close of the NYSE (normally 4:00 p.m., New York time) every Monday
through Friday (exclusive of national business holidays). The Trust's
offices will be closed, and net asset value will not be calculated, on
those days on which the NYSE is closed, which currently are: New Year's
Day, Presidents' Day, Martin Luther King Jr. Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Money Market Fund. Templeton Money Market Fund uses the amortized cost
method to determine the value of its portfolio securities pursuant to
Rule 2a-7 under the 1940 Act. The amortized cost method involves valuing a
security at its cost and amortizing any discount or premium over the
period until maturity, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method
provides certainty in valuation, it may result in periods during which the
value, as determined by amortized cost, is higher or lower than the
price which Templeton Money Market Fund would receive if the security were
sold. During these periods the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which utilizes a
method of valuation based upon market prices. Thus, during periods of
declining interest rates, if the use of the amortized cost method resulted
in a lower value of the Fund's portfolio on a particular day, a
prospective investor in the Fund would be able to obtain a somewhat higher
yield than would result from investment in a fund utilizing solely market
values, and existing Shareholders would receive corresponding less income.
The converse would apply during periods of rising interest rates.
In accordance with Rule 2a-7, the Fund is required to (i) maintain
a dollar-weighted average portfolio maturity of 90 days or less; (ii)
purchase only instruments having remaining maturities of 397 days or less;
and (iii) invest only in U.S. dollar denominated securities determined in
accordance with procedures established by the Board of Trustees to
present minimal credit risks and which are rated in one of the two highest
rating categories for debt obligations by at least two nationally
recognized statistical rating organizations (or one rating organization if
the instrument was rated by only one such organization, subject to
ratification of the investment by the Board of Trustees). If a security is
unrated, it must be of comparable quality as determined in accordance
with procedures established by the Board of Trustees, including
approval or ratification of the security by the Board except in the case
of U.S. Government securities. Pursuant to the Rule, the Board is
required to establish procedures designed to stabilize, to the extent
reasonably possible, the Fund's price per Share as computed for the
purpose of sales and redemptions at $1.00. Such procedures will
include review of the Fund's portfolio holdings by the Board of
Trustees, at such intervals as it may deem appropriate, to determine
whether the Fund's net asset value calculated by using available market
quotations deviates from $1.00 per Share based on amortized cost. The
extent of any deviation will be examined by the Board of Trustees. If such
deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a
deviation exists which may result in material dilution or other unfair
results to investors or existing Shareholders, the Board will take
such corrective action as it regards as necessary and appropriate,
including the sale of portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio maturity,
withholding dividends or establishing a net asset value per Share by using
available market quotations.
The Net Asset Value per share of each Fund except the Money Market Fund is
calculated as follows: the aggregate of all liabilities, including, without
limitation, the current market value of any outstanding options written by a
Fund, if any, accrued expenses and taxes and any necessary reserves, is
deducted from total gross value of all assets, and the difference is divided
by the number of shares of that Fund outstanding at the time. For the purpose
of determining the aggregate net assets of each Fund (except the Money
Market Fund), cash and receivables are valued at their realizable amounts,
interest is recorded as accrued, and dividends are recorded on the
ex-dividend date.
Portfolio securities listed on a securities exchange or on NASDAQ for
which market quotations are readily available are valued at the last
quoted sale price of the day or, if there is no such reported sale, within
the range of the most recent quoted bid and ask prices. Over-the-counter
portfolio securities are valued within the range of the most recent
quoted bid and ask prices as obtained from one or more dealers that make
markets in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by the
Investment Managers. Portfolio securities underlying actively traded options
are valued at their market price as determined above. The current market
value of any option held by a Fund is its last sale price on the relevant
NYSE prior to the time when the assets are valued. Lacking any sales that day
or if the last sales price is outside the bid and ask prices, the options are
valued within the range of the current closing bid and ask prices if such
valuation is believed to fairly reflect the contract's market value. If a
Fund should have an open position to a security, the valuation of the
contract will be within the range of the bid and ask prices.
The value of a foreign security is determined as of the close of trading on
the foreign exchange on which it is traded or as of the close of trading on
the Exchange, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, Eastern
time, on the day the value of the foreign security is determined. If no sale
is reported at that time, the foreign security is valued within the range of
the most recent quoted bid and ask prices. Occasionally, events which affect
the values of foreign securities and foreign exchange rates may occur between
the times at which values and rates are determined and the close of the
Exchange and will, therefore, not be reflected in the computation of a
Portfolio's net asset value. If events materially affecting the value of
these foreign securities occur during such periods, then these securities
will be valued in accordance with procedures established by the Board of
Trustees.
Trading in securities on European and Far Eastern exchanges and
over-the-counter markets is normally completed well before the close
of business in New York on each day on which the NYSE is open.
Trading of European or Far Eastern securities generally, or in a
particular country or countries, may not take place on every New York
business day. Furthermore, trading takes place in various foreign markets
on days which are not business days in New York and on which the Funds' net
asset values are not calculated. Thus, such calculation does not take
place contemporaneously with the determination of the prices of many of
the portfolios securities used in such calculation and, if events
materially affecting the value of those foreign securities occur, they will
be valued at fair market value as determined by the management and
approved in good faith by the Board of Trustees.
Generally, trading in corporate bonds, U.S. government securities and
Money Market Instruments is substantially completed each day at various
times prior to the scheduled close of the Exchange. The value of these
securities used in computing the net asset value of each class is
determined as of such times. Occasionally, events affecting the values
of such securities may occur between the times at which they are
determined and the scheduled close of the Exchange that will not be
reflected in the computation of the Net Asset Value of each class. If
events materially affecting the values of these securities occur during
such period, then the securities will be valued at their fair value as
determined in good faith by the Board.
Other securities for which market quotations are readily available are
valued at the current market price, which may be obtained from a pricing
service, based on a variety of factors including recent trades,
institutional size trading in similar types of securities (considering
yield, risk and maturity) and/or developments related to specific issues.
Securities and other assets for which market prices are not readily
available are valued at fair value as determined following procedures
approved by the Board. With the approval of the Board of Trustees, a
Fund may utilize a pricing service, bank or securities dealer to
perform any of the above described functions.
Redemptions in Kind. Redemption proceeds are normally paid in cash; however
each Fund may pay the redemption price in whole or in part by a distribution
in kind of securities from the portfolio of the Fund, in lieu of cash, in
conformity with rules of the SEC. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's net asset
value. If Shares are redeemed in kind, the redeeming Shareholder might
incur brokerage costs in converting the assets into cash. Each Fund is
obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1%
of its net assets during any 90-day period for any one Shareholder.
The Class 2 Distribution Plan Each Class 2 of the Trust, except for the
Money Market Fund, has adopted a distribution plan or "Rule 12b-1" Plan
("Plan") pursuant to rule 12b-1 of the 1940 Act. Under the Plans, each
Fund offering Class 2 shares, except the Templeton Bond Fund, may pay up
to a maximum of 0.25% per year of the average daily net assets attributable
to their respective Class 2 shares. Under the Templeton Bond Fund's Class
2 Plan, the Templeton Bond Fund may pay up to a maximum of 0.15% per year
of the average daily net assets attributable to its Class 2 shares. These
fees may be used to compensate the Trust's distributor, Franklin/Templeton
Distributors, Inc. ("Distributors"), the Insurance Companies or others for
distribution and related services and as a servicing fee.
The terms and provisions of the Plan, including terms and provisions
relating to required reports, term, and approval, are consistent with Rule
12b-1. In no event shall the aggregate asset-based sales charges,
which include payments made under each plan exceed the amount permitted
to be paid under the rules of the National Association of Securities Dealers,
Inc.
Each plan has been approved in accordance with the provisions of Rule
12b-1. The plans are renewable annually by a vote of the Board, including a
majority vote of the Board members who are not interested persons of the
Trust and who have no direct or indirect financial interest in the
operation of the plans, cast in person at a meeting called for that purpose.
It is also required that the selection and nomination of such Board
members be done by the non-interested members of the Board. The plans
and any related agreement may be terminated at any time, without
penalty, by vote of a majority of the non-interested Board members on not
more than 60 days' written notice, by Distributors on not more than 60
days' written notice, by any act that constitutes an assignment of a
management agreement with an Investment Manager, or by vote of a
majority of the outstanding shares of the class. Distributors, the
Insurance Companies or others may also terminate their respective
distribution or service agreement at any time upon written notice.
The plans and any related agreements may not be amended to
increase materially the amount to be spent for distribution expenses
without approval by a majority of the outstanding shares of the class,
and all material amendments to the plans or any related agreements shall be
approved by a vote of the non-interested members of the Board, cast in
person at a meeting called for the purpose of voting on any such amendment.
A report will be submitted in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any
related agreements, and the Board will be furnished with such other
information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the plans should be continued.
TAX STATUS
Templeton Money Market Fund intends to declare dividends daily and to
pay dividends monthly. All other Funds normally intend to pay an annual
dividend representing
substantially all of their net investment income and to distribute
annually any net realized capital gains. By so doing and meeting certain
diversification of assets and other requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), and as described in
the Prospectus, each Fund intends to qualify as a regulated investment
company under the Code. The status of the Funds as regulated investment
companies does not involve government supervision or management of their
investment practices or policies. As a regulated investment company, each
Fund will be relieved of liability for United States federal income tax on
that portion of its net investment income and net realized capital gains
which it distributes to its Separate Account Shareholders.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4%
excise tax unless the exception described below applies. To avoid
the tax if it otherwise applies, a Fund must distribute during each
calendar year, (i) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (ii) at least
98% of its capital gains in excess of its capital losses for the
twelve-month period ending on October 31 of the calendar year (adjusted for
certain ordinary losses), and (iii) all ordinary income and capital
gains for previous years that were not distributed during such years.
To avoid application of the excise tax, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
A distribution will be treated as paid on December 31 of the
calendar if it is declared by a Fund during October, November, or
December of that year to Shareholders of record on a date in such a month
and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (a Separate Account) in the
calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. The excise
tax provisions described above will not apply in a given calendar year to a
Fund if all of its shareholders at all times during the calendar
year are segregated asset accounts of life insurance companies where the
shares are held in connection with variable contracts. (For this purpose,
any shares of a regulated investment company attributable to an
investment not exceeding $250,000 made in connection with the organization
of the company is not taken into account.) Accordingly, if this
condition regarding the ownership of Shares of each of the Funds is met,
the excise tax will be in applicable to that Fund even if the calendar year
distribution requirement is not met.
The Funds may invest in shares of foreign corporations which may
be classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets or
75% or more of its gross income is investment-type income. If a Fund
receives a so-called "excess is distribution" with respect to PFIC stock,
the Fund itself may be subject to tax on a portion of the excess
distribution, whether or not the corresponding income is distributed by the
Fund to Shareholders. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period
during which a Fund held the PFIC shares. A Fund itself will be subject
to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the
PFIC rules, certain excess distributions might have been classified
as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares.
Under an election that currently is available in some circumstances,
a Fund generally would be required to include in its gross income its
share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to
the taxation of excess distributions, would not apply. In addition,
another election may be available that would involve marking to market
the Fund's PFIC shares at the end of each taxable year (and on certain
other dates prescribed in the Code), with the result that unrealized gains
are treated as though they were realized. If this election were made, tax
at the Fund level under the PFIC rules would generally be eliminated, but
the Fund could, in limited circumstances, incur nondeductible interest
charges. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing
of the recognition of income with respect to PFIC shares, as well as
subject a Fund itself to tax on certain income from PFIC shares, the
amount that must be distributed to Shareholders, and which will be
taxed to Shareholders as ordinary income or long-term capital gain,
may be increased or decreased substantially as compared to a fund that did
not invest in PFIC shares.
Income received by a Fund from sources within a foreign country may
be subject to withholding taxes and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time that Fund actually collects such
receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debts
securities denominated a foreign currency and on disposition of certain
financial contracts and forward contracts, gains or losses attributable
to fluctuations in the value of foreign currency between the date of
acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease
the amount of a Fund's net investment income to be distributed to its
Shareholders as ordinary income.
Debt securities purchased by a Fund may be treated for federal income
tax purposes as having original issue discount.
Original issue discount essentially represents interest for federal
income tax purposes and can be defined generally as the excess of the
stated redemption price at maturity over the issue price. Original issue
discount, whether or not any income is actually received by a Fund, is
treated for U.S. federal income tax purposes as ordinary income earned by
the Fund, and therefore is subject to the distribution requirements of
the Code. Generally, the amount of original issue discount included in
the income of a Fund each year is determined on the basis of a constant
yield to maturity which takes into account the compounding of accrued
but unpaid interest.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for Federal
income tax purposes. The gain realized on the disposition of any taxable
debt security having market discount will be treated as ordinary income
to the extent it does not exceed the accrued market discount on such debt
security. Generally, market discount accrues on a daily basis for each
day the debt security is held by the Fund at a constant rate over the
time remaining to the debt security's maturity or, at the election of the
Fund, at a constant yield to maturity which takes into account the
semiannual compounding of interest.
Certain options, futures contracts and forward contracts in which
the Templeton Stock, Bond, Asset Allocation, Developing Markets and
International Funds may invest are "section 1256 contracts." Gains or
losses on section 1256 contracts generally are considered 60% long-term
and 40% short-term capital gains or losses ("60-40"), except for certain
foreign currency gains and losses which will be treated as ordinary in
character. Also, section 1256 contracts held by a Fund at the end of each
taxable year (and, in some cases, for purposes of the 4% excise tax,
on October 31 of each year) are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were realized.
The hedging transactions undertaken by certain of the Funds may result
in "straddles" for federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by a Fund. In
addition, losses realized by a Fund oppositions that are part of a
straddle may be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable year in
which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax
consequences to the Funds of hedging transactions are not entirely
clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Funds which is taxed as ordinary income
when distributed to Shareholders.
Each Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under
rules that vary according to the elections made. The rules applicable
under certain of the elections may operate to accelerate the recognition
of gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or
decreased substantially as compared to a fund that did not engage in such
hedging transactions.
The requirements under the Code relating to the qualification of a Fund as
a regulated investment company may limit the extent to which a Fund may
engage in futures and forward currency contracts.
Distributions of any net investment income and of any net realized short
term capital gains are treated as ordinary income for tax purposes in the
hands of the Separate Account Shareholder. The excess of any net
long-term capital gains over net short-term capital losses will, to the
extent distributed and designated by the distributing Fund as a capital gain
dividend, be treated as long-term capital gains in the hands of the
Shareholder regardless of the length of time a Separate Account may have
held the Shares.
Reference is made to the Prospectus for the applicable Contract for
information regarding the federal income tax treatment of distributions
to owners of contracts.
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences, conversion and
other rights,
voting powers, restrictions and limitations as to dividends,
qualifications, and terms and conditions of redemption, except as
follows: all consideration received from the sale of Shares of a Fund,
together with all income, earnings, profits and proceeds thereof, belongs
to that Fund and is charged with liabilities in respect to that Fund and
of that Fund's part of general liabilities of the Trust in the
proportion that the total net assets of the Fund bear to the total net
assets of all Funds. In addition, Class 2 Shares of each Fund offering
Class 2 Shares will bear the expense of the Class 2 Distribution plan as it
applies to each Fund. The net asset value of a Share of a class of a Fund is
based on the assets belonging to that Fund less the liabilities charged to
that class of the Fund, and dividends are paid on Shares of a class of a
Fund only out of lawfully available assets belonging to that class of
the Fund. In the event of liquidation or dissolution of the Trust, the
Shareholders of each Fund will be entitled, out of assets of the Fund
available for distributions, to the assets belonging to that particular Fund.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However,
the Declaration of Trust disclaims liability of the Shareholders,
Trustees or officers of the Trust for acts or obligations of the Trust,
which, under the terms of the Declaration of Trust, are binding only on
the property of the Trust, which, under the terms of the Declaration of
Trust, are binding only on the property of the Trust. The Declaration
of the Trust provides for indemnification out of Trust property for
all loss and expense of any Shareholder held personally liable for the
obligations of the Trust. The risk of a Shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations and, thus, should be
considered remote.
PERFORMANCE INFORMATION
Performance quotations are subject to SEC rules. These rules require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation be accompanied by certain
standardized performance information computed as required by the SEC. On May
1, 1997, each Fund (except the Money Fund) began offering Class 2 shares
and renamed its existing shares as Class 1 shares. Any Class 2
performance shown for the periods prior to May 1, 1997 represents the
historical results of Class 1 Shares. Performance of Class 2 shares for
the periods after May 1, 1997 reflects Class 2's higher annual fees and
expenses resulting from its Rule 12b-1 plan. Historical performance data
for Class 2 will generally not be restated to include 12b-1 fees,
although the Trust may restate these figures consistent with SEC rules.
Regardless of the method used, past performance does not guarantee
future results, and is an indication of the return to shareholders only
for the limited historical period used.
The Trust may, from time to time, include the yield and effective yield
of Templeton
Money Market Fund or the total return of all Funds in advertisements
or reports to Shareholders or prospective investors. Performance
information for the Funds will not be advertised unless accompanied by
comparable performance information for a separate account to which the
Funds offer their Shares.
Current yield for Templeton Money Market Fund will be based on the change
in the value of a hypothetical investment (exclusive of capital changes)
over a particular seven-day period, less a pro-rata share of Templeton
Money Market Fund expenses accrued over that period (the "base period"),
and stated as a percentage of the investment at the start of the base
period (the "base period return"). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent. "Effective
Yield" for Templeton Money Market Fund assumes that all dividends
received during an annual period have been reinvested. Calculation
of "effective yield" begins with the same "base period return" used in
the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = (1 + Base Period Return) 365/7 - 1
6
Yield = 2 [(1 + A-B) - 1]
cd
where:
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Shares outstanding during the period that
were entitled to receive dividends, and
d = the maximum offering price per Share on the last day of the period.
For the seven-day period ending December 31, 1997, the 7-day annualized
yield of Money Market Fund was [ ]% and the effective yield of Money
Market Fund was [ ]%.
Quotations of average annual total return for the Funds will be expressed
in terms of the average annual compounded rate of return for periods in
excess of one year or the total return for periods less than one year of a
hypothetical investment in the Funds over periods of one, five, or ten years
(up to the life of a Fund) calculated pursuant to the following formula: P(1+
T)n = ERV (where P = a hypothetical initial payment of $1,000,T = the
average annual total return for periods of one year or more or the total
return for periods of less than one year, n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the period). All total return figures reflect the
deduction of the maximum initial sales charge and deduction of a
proportional share of Fund expenses on an annual basis, and assume that
all dividends and distributions are reinvested when paid. The
following table shows the average annual total returns for each Fund for
the indicated periods ended December 31, 1997:
[to be supplied in later B Amendment]
Performance information for a Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors
may compare the Fund's results with those of a group of unmanaged
securities widely regarded by investors as representative of the
securities market in general; (ii) other groups of mutual funds
tracked by Lipper Analytical Services, Inc., a widely used independent
research firm which ranks mutual funds by overall performance, investment
objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or
other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in a Fund.
Unmanaged indices may assume the reinvestment of dividends but generally
do not reflect deductions for administrative and management costs and
expenses.
Quotations of yield or total return for a Fund will not take into
account charges and deductions against any separate account to which
the Funds' Shares are sold or charges and deductions against variable
insurance contracts, although comparable performance information for a
separate account will take such charges into account. Performance
information for a Fund reflects only the performance of a hypothetical
investment in a Fund during the particular time period on which the
calculations are based. Performance information should be considered in
light of a Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time
period, and should not be considered as a representation of what may be
achieved in the future.
From time to time, each Fund and the Investment Managers may also refer
to the following information:
(1) The Investment Managers' and their affiliates' market share of
international equities managed in mutual funds prepared or published
by Strategic Insight or a similar statistical organization.
(2) The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley Capital
International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as prepared
or published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization.
(4) The geographic distribution of the Fund's portfolio and the Fund's
top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due
to a liberalization of securities laws and a reduction of foreign exchange
controls, and improving communication technology, of various countries as
published by various statistical organizations.
(6) To assist investors in understanding the different returns and
risk characteristics of various investments, the Fund may show historical
returns of various investments and published indices (E.G., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as published
by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of persistent
long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide search for
undervalued or "bargain" securities and its diversification by industry,
nation and type of stocks or other securities.
(12) The number of Shareholders in the Fund or the aggregate number
of shareholders of the Franklin Templeton Funds or the dollar amount of fund
and private account assets under management in advertising materials.
(13) Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
(14) Quotations from the Templeton organization's founder, Sir John
Templeton,**
advocating the virtues of diversification and long-term investing,
including the following:
o "Never follow the crowd. Superior performance is possible only if
you invest differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
o "Buy low."
o "When buying stocks, search for bargains among quality stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even understand all the
questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or negative too often."
**Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October 1992 and resigned from the Trust's Board on
April 15, 1995. He is no longer involved with the investment management
process.
FINANCIAL STATEMENTS
The audited financial statements contained in the Trust's Annual Report to
Shareholders dated December 31, 1997, [will be supplied in later B Amendment].
TEMPLETON VARIABLE PRODUCTS SERIES FUND
File Nos. 33-20313
FORM N-1A
PART C
Other Information
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
[To be supplied with B Amendment]
(b) Exhibits:
The following exhibits where applicable, are herewith incorporated by
reference to the filings as noted with the exception of Exhibit 5(i); which
is attached.
(1) Declaration of Trust
Filing: Registration Statement of Registrant on
Form N-1A
File No. 33-20313
Filing Date: February 25, 1988
(2) copies of the By-Laws or instruments corresponding
thereto;
(3) copies of any voting trust agreement with respect to
more than five percent of any class of equity
securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the
Registrant, including copies of all constituent
instruments, defining the rights of the holders of
such securities, and copies of each security being
registered;
Not Applicable
(5) Copies of all investment advisory contracts relating
to the management of the assets of the Registrant;
(a) Amended and Restated Investment Management
Agreement for Templeton Money Market Fund and Templeton
Bond Fund
Filing: Registration Statement of Registrant on Form
N-1A
File No. 33-20313
Filing Date: February 27, 1995
(b) Form of Investment Management Agreement for Templeton
Developing Markets Fund
Filing: Post-Effective Amendment No. 12 to
Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996
(c) Form of Investment Management Agreement between Registrant
on behalf of the Templeton Asset Allocation Fund and
Templeton Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to
Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(d) Form of Investment Management Agreement between Registrant
on behalf of the Templeton Stock Fund and Templeton
Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(e) Form of Investment Management Agreement between Registrant
on behalf of the Templeton International Fund and Templeton
Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(f) Form of Investment Management Agreement between Registrant
on behalf of Franklin Growth Investments Fund and Franklin
Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(g) Form of Investment Management Agreement between Registrant
on behalf of the Mutual Discovery Investments Fund and
Franklin Mutual Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(h) Form of Investment Management Agreement between Registrant
on behalf of the Mutual Shares Investments Fund and
Franklin Mutual Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(i) Form of Managememt Agreement between Registrant on
behalf of Franklin Small Cap Investment Fund and
Franklin Advisers, Inc.
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
(a) Amended and Restated Distribution Agreement
Filing: Post-Effective Amendment No.10 to
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: December 22, 1995
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish
a reasonably
detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940
Act"), with respect to securities and similar investments of the
Registrant,
including the schedule of remuneration;
(a) Amended and Restated Custodian Agreement
Filing: Post-Effective Amendment No.13 to
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: April 12, 1996
(b) Form of Custody Agreement between Registrant on behalf of
Mutual Discovery Investments Fund and Mutual Shares
Investments Fund, and the State Street Bank and Trust
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(c) Form of Master Custody Agreement between the Registrant on
behalf of Franklin Growth Investments Fund and the Bank of
New York
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(9) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement;
(a) Form of Amended and Restated Business Management Agreement
Filing: Post-Effective Amendment No.12 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996
(10) an opinion and consent of counsel as to the legality
of the securities being registered, indicating
whether they will when sold be legally issued, fully
paid and nonassessable;
(a) Opinion of Counsel - filed with Rule 24f-2 Notice
on February 26, 1997
(11) Copies of any other rulings and consents to the use
thereof relied on in the preparation of this
registration statement and required by Section 7 of
the 1933 Act;
Not Applicable
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in
consideration for providing the initial capital
between or among the Registrant, the underwriter,
adviser, promoter or initial stockholders and
written assurances from promoters or initial
stockholders that their purchases were made for
investment purposes without any present intention of
redeeming or reselling;
(a) Letter concerning initial capital
Filing: Post-Effective Amendment No. 2 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: August 26, 1988
(14) copies of the model plan used in the establishment
of any retirement plan in conjunction with which
Registrant offers its securities, any instructions
thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and
fees charged in connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant
pursuant to Rule 12b-1 under the 1940 Act, which
describes all material aspects of the financing of
distribution of Registrant's shares, and any
agreements with any person relating to
implementation of such plan.
(a) Form of Distribution Plan between the Registrant on
behalf Of Templeton Asset Allocation Fund, Templeton
Bond Fund, Templeton Developing Markets Fund, Templeton
International Fund, Templeton Stock Fund, Franklin
Growth Investments Fund, Mutual Shares Investments
Fund, Mutual Discovery Investments Fund and Franklin
Templeton Distributors
Filing: Post-effective Amendment No. 14 To
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(16) Schedule for computation of each performance
quotation provided in the registration statement in
response to Item 22 (which need not be audited).
(a) Previously filed with Post-Effective Amendment No.
9 to Registration Statement filed on April
27,1995
(17) Power of Attorney
(a) Power of Attorney from Officers and Directors of
the Registrant executed December 12, 1996
Filing: Post-Effective Amendment No. 14 to
Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF April 1, 1998
- -------------- --------------------
Templeton Stock Fund
Templeton Bond Fund
Templeton Asset Allocation Fund
Templeton Money Market Fund
Templeton International Fund
Templeton Developing Markets Fund
(To be supplied in B Amendment)
ITEM 27 INDEMNIFICATION
Reference is made to Article IV of the Registrant's Declaration of Trust, which
is incorporated herein by reference. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant pursuant to the
Declaration of Trust or otherwise, the Registrant is aware that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act, and, therefore, is unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding)is asserted by such trustees, officers or
controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) The officers and directors of the Registrant's
investment adviser also serve as officers and/or directors or
trustees for (1) Franklin Resources, Inc. ("Resources"), the
corporate parent of all the Registrant's Investment Managers, and/or (2)
other investment companies in the Franklin
Group of Funds.
(b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to all Funds in the Trust except the
Templeton Developing Markets, Mutual Discovery Investments, Mutual Shares
Investments, Franklin Growth Investments and Franklin Small Cap Investments
Funds and in that capacity furnishes portfolio management services and
investment research. For additional information please see Part B and Schedules
A and D of Form ADV of TICI (SEC File 801-15125), incorporated herein by
reference, which set forth the officers and directors of TICI and information as
to any business, profession, vocation of employment of a substantial nature
engaged in by those officers and directors during the past two years.
(b) Templeton Asset Management Ltd.
Templeton Asset Management Ltd., formerly known as
Templeton Investment Management (Singapore)Pte Ltd.Templeton
Asset Management ("Templeton Singapore"), an indirect, wholly
Owned subsidiary of Resources, serves as investment manager to
Templeton Developing Markets Fund. For information please see
Part B and Schedules A and D of Form ADV of Templeton Singapore
(SEC File 801-46997), incorporated herein by reference, which set
forth the officers and directors of Templeton Singapore and
information as to any business, profession, vocation of
employment of a substantial nature engaged in by those officers
and directors during the past two years.
(c) Franklin Mutual Advisers, Inc.
Franklin Mutual
Advisers, Inc. ("Mutual Advisers"), a direct, wholly owned
subsidiary of Resources, will serve as investment manager to the
Mutual Discovery Investments Fund and the Mutual Series
Investments Fund. For information please see Part B and
Schedules A and D of Form ADV of Mutual Advisers (SEC File 801-
53068), incorporated herein by reference, which set forth
the officers and directors of Mutual Advisers and information as
to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors
during the past two years.
(d) Franklin Advisers, Inc. Franklin Advisers, Inc.
("Advisers"), a direct wholly owned subsidiary of Resources, will
serve as Investment Manager to the Franklin Growth Investments
Fund and Franklin Small Cap Investments Fund. For additional information,
please see Part B and Schedules A and D of Form ADV of Advisers (SEC File
801-26292), incorporated herein by reference, which sets forth the officers
and directors of Advisers and information as to any business, profession,
vocation or employment of a substantial nature engaged in by those officers
and directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
Franklin Templeton Distributors, Inc. also acts as principal
underwriter of shares of the following investment companies:
AGE High Income Fund, Inc. Franklin Balance Sheet Investment Fund
Franklin California Tax-Free Income Fund, Inc. Franklin
California Tax-Free Trust Franklin Custodian Funds, Inc. Franklin
Equity Fund Franklin Federal Money Fund Franklin Federal Tax-Free
Income Fund Franklin Gold Fund Franklin Investors Securities
Trust Franklin Managed Trust Franklin Money Fund Franklin
Municipal Securities Trust Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust Franklin Asset Allocation Fund
Franklin Real Estate Securities Trust Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund Franklin Tax-Advantaged
International Bond Fund Franklin
Tax-Advantaged U.S.Government Securities Fund
Franklin Tax Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Japan Fund
Franklin Templeton Money Fund Trust
Franklin Templeton Fund Allocator Series
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Real Estate Securities Fund
Templeton Smaller Companies Growth, Inc.
(b) The directors and officers of FTD, located at 700 Central
Avenue, P.O. Box 33030, St. Petersburg, Florida 33733, are
as follows:
NAME POSITION WITH UNDERWRITER POSITION WITH REGISTRANT
Charles B. Johnson Chairman of the Board Chairman, Trustee and
Vice
President
Gregory E. Johnson President None
Rupert H. Johnson Executive Vice President Vice President
Harmon E. Burns Executive Vice President Vice President
and Director
Edward V. McVey Senior Vice President None
Kenneth A. Lewis Treasurer None
William J. Lippman Senior Vice President None
Deborah R. Gatzek Senior Vice President Vice President
and Assistant Secretary
Richard C. Stoker Senior Vice President None
Daniel T. O'Lear Senior Vice President None
Charles E. Johnson Senior Vice President President
Loretta Fry Vice President None
James K. Blinn Vice President None
Richard O. Conboy Vice President None
James A. Escobedo Vice President None
Bert W. Feuss Vice President None
Robert N. Geppner Vice President None
Mike Hackett Vice President None
Peter Jones Vice President None
Philip J. Kearns Vice President None
Ken Leder Vice President None
Jack Lemein Vice President None
John R. McGee Vice President None
Harry G. Mumford Vice President None
Vivian J. Palmieri Vice President None
Kent P. Strazza Vice President None
Sarah Stypa Vice President None
Francie Arnone Vice President None
Alison Hawksley Vice President None
John R. Kay Assistant Vice President Vice President
Susan Thompson Assistant Vice President None
Virginia Marans Assistant Vice President None
Bernadette Marino Assistant Vice President None
Howard
Andrea Dover Assistant Vice President None
Laura Komar Assistant Vice President None
Leslie M. Kratter Secretary None
Karen DeBellis Assistant Treasurer Assistant Treasurer
Philip A. Scatena Assistant Treasurer None
(c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, and other documents required to be maintained by Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and rules
promulgated thereunder are in the possession of Templeton Funds Annuity Company,
100 Fountain Parkway, St. Petersburg, Florida 33716-1205, and Registrant, 500 E.
Broward Blvd., Fort Lauderdale, Florida 33394-3091.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) Not applicable
(b) The Registrant hereby undertakes to file post-effective
amendments for its new series, Mutual Discovery Investments Fund,
Mutual Shares Investments Fund and Franklin Growth Investments
Fund (all of which were effective May 1, 1997 but have not sold
any shares or begun operations) and Franklin Small Cap
Investments Fund (which is expected to become effective May 1,
1998) using financial statements which need not be certified,
within four to six months from the later of (i) the effective
date of Registrant's Registration Statement under the Securities
Act of 1933 or (ii) the date the series sell shares or begin
operations.
(c) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each
person to whom a prospectus is delivered a copy of the annual
report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this post-effective
amendment to the Registrant's Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of San Mateo and the
State of California, on the 30th day of April, 1997.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By: /s/Charles E. Johnson*
Charles E. Johnson, President
*By:/s/ Karen L. Skidmore
Karen L. Skidmore
as attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
Charles E. Johnson* Principal Executive Officer and Trustee
Charles E. Johnson Dated: April 30,1997
Fred R. Millsaps* Trustee
Fred R. Millsaps Dated: April 30, 1997
Edith E. Holiday Trustee
Edith E. Holiday Dated: April 30, 1997
Betty P. Krahmer* Trustee
Betty P. Krahmer Dated: April 30, 1997
Charles B. Johnson* Trustee
Charles B. Johnson Dated: April 30, 1997
Harris J. Ashton* Trustee
Harris J. Ashton Dated: April 30, 1997
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: April 30, 1997
Andrew H. Hines, Jr.* Trustee
Andrew H. Hines, Jr. Dated: April 30, 1997
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: April 30, 1997
Nicholas F. Brady* Trustee
Nicholas F. Brady Dated: April 30, 1997
James R. Baio* Trustee
James R. Baio Dated: April 30, 1997
*By
/s/Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney listed in item 24(b) (17)
TEMPLETON VARIABLE PRODUCTS SERIES FUND
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1 Declaration of Trust *
EX-99.B2 By-Laws *
EX-99.B5(a) Amended and Restated Investment *
ManagementAgreement for Templeton Money
Market Fund and Templeton Bond Fund
EX-99.B5(b) Form of Investment Management Agreement *
for Templeton Developing Markets Fund
EX-99.B5(c) Form of Investment Management Agreement between *
Registrant on behalf of the
Templeton Asset Allocation Fund and
Templeton Investment Counsel, Inc.
EX-99.B5(d) Form of Investment Management Agreement *
Between Registrant on behalf of the
Templeton Stock Fund and Templeton
Investment Counsel, Inc.
EX-99.B5(e) Form of Investment Management Agreement between *
Registrant on behalf of the
Templeton International Fund and
Templeton Investment Counsel, Inc.
EX-99.B5(f) Form of Investment Management Agreement *
between Registrant on behalf of Franklin Growth
Investments Fund and Franklin Advisers, Inc.
*
EX-99.B5(g) Form of Investment Management Agreement between *
Registrant on behalf of the
Mutual Discovery Investments Fund and Franklin Mutual
Advisers, Inc. *
EX-99.B5(h) Form of Investment Management Agreement between *
Registrant on behalf of the
Mutual Shares Investments Fund and
Franklin Mutual Advisers, Inc.
EX-99.B5(i) Form of Management Agreement between ATTACHED
Registrant on behalf of Franklin Small
Cap Investment Fund and Franklin
Advisers, Inc.
EX-99.B8(a) Amended and Restated Custodian *
Agreement
EX-99.B8(b) Form of Custody Agreement between *
Registrant on behalf of Mutual Discovery Investments
Fund and Mutual Shares
Investments Fund and the State Street
Bank and Trust
EX-99.B8(c) Form of Master Custody Agreement *
Between the Registrant on behalf
Franklin Growth Investments Fund and
the Bank of New York
EX-99.B9 (a) Form of Amended and Restated *
Business Management Agreement
EX-99.B10 (a) Opinion of Counsel *
EX-99.B11 (a) Consent of Independent Auditors dated *
April 21, 1997
EX-99.B13 (a) Letter concerning initial capital *
EX-99.B15(a) Form of Distribution Plan between the *
Registrant on behalf of Templeton Asset
Allocation Fund Templeton Bond Fund,
Templeton Developing Markets Fund,
Templeton International Fund, Templeton
Stock Fund, Franklin Growth Investments
Fund, Mutual Shares Investments Fund,
Mutual Discovery Investments Fund and
Franklin Templeton Distributors
EX-99.B16(a) Scheduled for computation of each *
performance quotation
EX-99.B17(a) Power of Attorney from Officers and *
Directors of the Registrant executed
December 12, 1996
*Incorporated by Reference
FORM OF
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of February 26, 1998 between TEMPLETON
VARIABLE PRODUCTS SERIES FUND, a Massachusetts business trust (hereinafter
referred to as the "Trust"), on behalf of its series FRANKLIN SMALL CAP
INVESTMENTS FUND ("Fund")and FRANKLIN ADVISERS, INC., ("Investment Manager").
WHEREAS, the Trust has been organized and intends to operate as
an investment company registered under the Investment Company Act of 1940
(the "1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust, on behalf of the Fund, desires to avail itself of the services of
the Investment Manager; and,
WHEREAS, the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, is engaged in the business of
rendering investment management services and desires to provide these
services to the Fund.
THEREFORE, in consideration of the mutual agreements herein made,
the Trust and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the
Trust's Agreement and Declaration of Trust and the Fund's investment policies
as adopted and declared by the Trust's Board of Trustees. In pursuance of
the foregoing, the Investment Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of
its investment securities, and shall take such steps as may be necessary to
implement those determinations. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent
to corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised, subject to guidelines adopted by the Board of
Trustees.
(2) The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Trust, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the
execution of a securities transaction by a broker involves
a number of considerations, including, without limitation,
the overall direct net economic result to the Fund
(involving both price paid or received and any commissions
and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the
financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall
reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign
securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and
research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), for the Fund and/or other accounts, if any,
for which the Investment Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess
of the amount another broker would have charged for
effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt
to place a specific dollar value on the research or
execution services of a broker or on the portion of any
commission reflecting either of said services. In
demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show
that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance
to the Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based
on any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial
to the Fund to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under this Agreement.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under this Agreement. Research
furnished by brokers through which the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all research may
be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the
broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be
executed with primary market makers acting as principal,
except where, in the judgment of the Investment Manager,
better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to
include also shares of other registered investment
companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager)
by a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a
broker in which the sale of Fund shares is taken into
account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the
basis of best execution alone or best execution plus
research services, without taking account of or placing any
value upon such sale of the Fund's shares.
[ SUBJECT TO BOARD APPROVAL:(4) The Trust agrees to pay to
the Investment Manager a monthly fee in dollars at an annual rate of 0.75% of
the first $200 million of the Fund's average daily net assets, reduced for
such assets over $200 million to 0.65%, and further reduced for such assets
in excess of $1.3 billion to 0.55%, payable at the end of each calendar
month.]
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.
(5) This Agreement shall become effective on February 26, 1998
and shall continue in effect until April 30, 1999. If not sooner terminated,
this Agreement shall continue in effect for successive periods of 12 months
each thereafter, provided that each such continuance shall be specifically
approved annually by the vote of a majority of the Trust's Board of Trustees
who are not parties to this Agreement or "interested persons" (as defined in
the Investment Company Act of 1940 (the "1940 Act")) of any such party, cast
in person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Trust and the Fund
the use of the names "Franklin," "Templeton" or any name misleadingly
implying a continuing relationship between the Trust or the Fund and the
Investment Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(10) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of Florida, provided that nothing herein shall be construed
as being inconsistent with applicable Federal and state securities laws and
any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust.
(14) It is understood and expressly stipulated that neither the
holders of shares of the Trust nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By:___________________
FRANLIN ADVISERS, INC.
By:___________________
